So I hope very much that today, General Walker, you will give us the longer-term outlook, where we are headed as a country, and help us to understand how that fits in with our current budget deliberations.

The vote is now occurring on the Senate floor. There are about 5 minutes left. So I will recess the Committee and return. Again, I would ask that if Senator Domenici gets here before I return that he reopen the Committee and make his statement, and then we have an opportunity to hear from General Walker. I would ask that we wait until I return for Mr. Walker to begin his statement, if we could. [Recess.]

Senator DOMENICI. I ran into the Chairman en route. He suggested that I open the meeting and proceed with my opening remarks. He said he would be back soon, perhaps about the time I am finished. I had planned to yield to you, Senator, if you had some opening remarks, as soon as I am finished here. Senator CORZINE. Thank you.

OPENING STATEMENT OF SENATOR PETE V. DOMENICI

Senator DOMENICI. First of all, I want to say thank you to you again for joining us. I note that the title of this hearing is longterm budgetary issues, and I appreciate hearing GAO's assessment of the long term.

the pressure

I do, however, want to be honest and say I suspect that it is not very different from what we have known for a decade, and you have presented the evidence that you are going to present in a slightly different way to us heretofore, indicating the demographics that confront this country with reference to the future. When we look out 20, 30, even 40 years from now, from the demographic changes, especially of the baby-boom generation, will strain this Government if nothing is done to reform Social Security or Medicare. And I understand you told us that the last time you were here, and we had a little discussion about what it meant to reform them. Of course, in your position you were not talking about detailed reform within the programs but, rather, generally giving us some of your thoughts, which were very helpful.

But the story isn't new. There have been three commissions over the past decade whose missions have been to address long-term fiscal issues, and I assume that you and your people, as good as they are, have looked at all those and that the conclusions and the good thoughts have been incorporated in your discussion here today.

There was one commission on Entitlement Reform. I think we all remember it. It was led by Kerrey and Danforth. They were put on that to chair that with people having great enthusiasm that there would be major changes. Then there was the commission on the Future of Medicare, led by Senator Breaux and Representative Thomas, and then President Bush's commission to Strengthen Social Security. I see that all these reports contained information that is being summarized by you, Mr. Walker, and in a sense, given kind of a unity of understanding.

This Senator has always approached fiscal policy from a balanced viewpoint. Do what is best for the economy and the American people, both in the short term and the long term. That is getting more and more difficult to do. There is no question about it.

I believe the action we took last year to reduce the tax burden on Americans was best in the short and in the long term. A large majority of my colleagues agreed, as did Chairman Greenspan and other students of fiscal policy.

Tomorrow, I believe that we are going to receive yet more evidence that the recession was shallow, perhaps the shallowest in history. I don't know whether you, Mr. Walker, have commented on it in your remarks. I did not get a chance to read them. But it seems pretty obvious that the recession is going to be rather shallow.

In fact, many economists expect that we grew at about a positive 1 percent rate in the fourth quarter. This means that we only had one quarter of negative growth and the overall growth rate during the recession was about zero rather than being negative. That is good. That is good news for future Social Security recipients, too. In my view, one of the key reasons the recession was as shallow as it was was because the tax cut came in just at the right time. We were out there saying we needed to reduce taxes, which was an important issue, and at the same time it seems like the first cut came in right when the recession might have bottomed, along with Alan Greenspan's and his Federal Reserve reduction in interest rates I think kept this economy from going into deeper recession. Last year, I was concerned that we were on track, reducing our debts very rapidly, and then the rapidity with which we began to reduce our national debt caused me some concern. I don't have to repeat that concern now because obviously we don't have staring us in the face the huge surplus that concerned this Senator and others with reference to what would that money be used for.

I agree with the Director of the Congressional Budget Office who is fond of saying, and I quote, "It is not the size of the trust fund that matters, but the size of the economy." I would like to repeat that: "It is not the size of the trust fund that matters, but the size of the economy."

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Finally, Mr. Walker, at this time last year, GAO issued an extensive series of reports on the high-risk areas of the Federal Government. Those reports as well as the work that Director Daniels and the OMB staff are doing will be extremely helpful in terms of the short-run focus of policymakers. I commend you for those reports. I think they are very good.

There is inefficiency in this Government that must be addressed, and we can never let up. We have to take a shot at that regularly as policymakers, or inefficiency will grow and will be much bigger than anybody assumes. Maybe you can help us determine where the American people are not receiving their money's worth. I think you are uniquely equipped to do that.

Now I wonder if the Chairman wants to proceed or does he want to wait. Does anyone know? [Pause.]

Senator DOMENICI. OK, Senator, you are in charge.

Senator CORZINE. Not with you around, Senator Domenici, I assure you.

I didn't prepare a formal statement, but let me just say for the record that I think nothing is more important than sorting out this balance between those short-term realities that we must face as public officials and the needs of the economy and our long-term fis

cal stability, which will be upon us soon. The topic of this demographic bubble and its implications for medical care for Americans, not only the seniors but for all of Americans, along with the Social Security program is one that I think is as close to an honest dilemma that we face in our political life. And so resolving that and solutions to that, Mr. Walker, are ones that I am anxious to hear your thoughts about because we need to truly acknowledge that we are running into a Box Canyon on our fiscal affairs in this Nation. And I think we have a structure that doesn't provide solution for those.

I appreciate your commentary on it. It will be interesting to see how we can both finance Medicare, Medicaid, and our Social Security obligations and still perform the other functions of Government. And my fear is that we have prescribed a fiscal situation that reduces the role that Government plays to a level that is not acceptable to the American people on a whole host of other areas, including education and transportation infrastructure, et cetera.

I will stop here. The Chairman will be returning, but I look forward to your comments. I appreciate your straightforwardness and integrity on a whole host of issues in the reports that you have published in history.

Thank you.

Mr. WALKER. Thank you, Senator. [Pause.]

Senator CORZINE. Being a freshman Senator, I am learning how this works. Go ahead, Mr. Walker, and start your testimony. I think the Chairman should be here in a very few minutes.

STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES

Mr. WALKER. Thank you, Senator. I am pleased to return this year to present GAO's perspective on the long-range fiscal policy challenges facing the Congress and our Nation.

Thank you, Mr. Chairman. I am just on the second sentence, so your timing is impeccable.

We meet today in a situation that seems very different from that of last February. Today the challenges of combating terrorism and ensuring our homeland security have come to the fore as urgent claims on our attention and on the Federal budget. While there are indications that the economic recovery is underway, the recession that began last spring, according to the National Bureau of Economic Research, has had real consequences for the budget.

These are important changes in the past year. At the same time, the known fiscal pressures created by the retirement of the babyboom generation and rising health care costs remain the same this year as they have been for a number of years.

Absent substantive reform of entitlement programs, the rapid escalation of Federal spending for Social Security, Medicare, and Medicaid beginning less than 10 years from now is virtually certain to overwhelm the rest of the Federal budget. Indeed, the slowing economy and tax and spending decisions that were made during the past year, including increased spending levels necessary to respond to the new security challenges that we face, have increased these pressures on the budget. Correspondingly, the ultimate task

of addressing these needs without unduly exacerbating the longrange fiscal challenge has become more difficult.

In summary, I would like to make the following points, and I have a few charts to illustrate a few of these points.

The surpluses that this committee and many others worked to achieve, with the help of the economy, not only strengthened the economy for the longer term and helped us in our fiscal posture for the longer term, but also put us in a stronger position to respond to the events of September 11th and to the economic slowdown than otherwise would have been the case.

Going forward, the Nation's commitment to surpluses will be severely tested. A return to surplus will require sustained discipline and very difficult choices.

Because the longer-term outlook is driven in large part by known demographic trends, in some ways we can be surer about the outlook 20 years from now than about the forecast for the next few

years.

The message of GAO's updated simulations remains the same as last year: absent structural changes in entitlement programs for the elderly, in the long term persistent deficits and escalating debt will overwhelm the Federal budget.

Both longer-term pressures and new commitments undertaken after September 11th sharpen the need to look at competing claims and new priorities. A fundamental review, reassessment, and reprioritization of existing programs and activities is necessary both to increase fiscal flexibility and to make today's Federal Government fit the modern world. Stated differently, there is a need to engage in a fundamental reassessment of what is the proper role for the Federal Government in the 21st century and how should the Government do business in the 21st century.

This committee in the past-in particular, I know, Senator Domenici among others-has been very interested in trying to understand what works and what doesn't work within the base of Government. It is critically important that we get back to that. The fact of the matter is the numbers do not add up. We are not going to be able to sustain all the programs abd activities that we have now under current tax levels and projected tax levels; we would not be able to do it with huge increases in taxation-which I don't think would be acceptable or desirable-unless we end up dealing with some of these structural problems. That means we need to look at what exists today and ask whether or not it is still relevant in the 21st century; and if it is relevant in the 21st century, at what level of priority? Because there are new claims and competing needs before us. Look just at the health care area, where we already have a huge imbalance. There is increasing interest in having a prescription drug benefit, but at the same time we already have trillions of unfunded promises associated just Part A of Medicare alone, and prescription drugs represents the fastest-growing cost in health care.

The fiscal benchmarks and rules that moved us from deficit to surplus expire this year. Any successor system should facilitate both a debate about reprioritization of today's programs and spending and a better understanding of the long-term implications of current actions. Simply stated, there are many things that we may

be able to afford to do today but we may not be able to sustain in the future.

If I may, let me show you three charts that illustrate this. Now, these are simulations. These are not projections. It is difficult enough to go out 10 years, Mr. Chairman, as you noted. You can't have a great degree of precision.

On the other hand, there is a higher degree of certainty with regard to demographic trends, because most of those persons are alive today. We can't be as certain about economic growth, but about demographics there is less doubt.

We show three different fiscal scenarios here. First, we show "the baseline extended", and you and others have articulated what the limitations of that scenario are. Second, we show the path where the Social Security surplus is saved after we come back to where we are not using part of that for other spending, which starts in about 2010. Finally, we show a path in which increasing discretionary spending increases at the rate of the economy, which is historically what has happened in recent years, and the tax cut is extended. That is both growing spending at about the rate that it has been growing for a number of years and extending the tax cuts beyond the scheduled sunset dates.

We do not endorse any of these. We are is not intending to take a position one way or another. These are three separate fiscal simulations. The bottom line is it is bad under any one of the three.

There is a difference as to the timing. There is a difference as to the magnitude of the challenge. But the challenge exists, and the challenge is worse today than it was a year ago when I was here. The next chart

Chairman CONRAD. Could I just stop you?

Mr. WALKER. Yes, sir.

Chairman CONRAD. Just before you take that down, let's, if we can, quantify how bad this gets, because under any of these scenarios, you are approaching deficits of 20 percent of GDP. Is that correct?

Mr. WALKER. That is correct. It is just a matter of when

Chairman CONRAD. Twenty percent of gross domestic product as deficit. That would be-if we were to apply that today, try to put it in today's terms, that would mean $2 trillion of deficits. Is that correct?

Mr. WALKER. That is about right, roughly correct.

Chairman CONRAD. Yes.

Mr. WALKER. Today's dollars.

Chairman CONRAD. I hope people just stop and think about that. The whole budget today is $2 trillion. If we were to fast forward what your simulations are showing, we would be running $2 trillion deficits.

Mr. WALKER. At some point in time in the future.

Chairman CONRAD. At some point in time in the future, but that is applying the size of the economy today to the level of deficit you have in the future applied to the size of the economy today.

Mr. WALKER. Correct. Now, obviously the economy will be bigger in the future, so it will be 20 percent of the future

Chairman CONRAD. Of an even bigger number.

Mr. WALKER. Correct.