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Mr. Chairman and members of the Subcommittee on Economic Stabilization, I appreciate the opportunity to appear here this morning to discuss the budget outlook, how budget deficits affect long-term economic growth, and the role of the deficit in the current economic downturn.

The Congressional Budget Office (CBO) and most economists have concluded that persistent federal deficits of the sort this country has experienced for over a decade dampen the rate of productivity and economic growth. Ultimately, the large deficits keep living standards from attaining the level they could reach if the deficits were smaller. The problem is all the more pressing because the deficits are occurring at a time when other factors--low private saving rates, the slow growth in productivity, and demographic trends--will also tend to restrain the improvement of living standards.

Federal fiscal policy could partially counteract these long-term developments. A fiscal policy designed to spur investment and saving, both through a reduction in federal borrowing and through properly tailored spending and taxation policies, could provide an important boost to long-term growth. Among these policies, decisions about the size of the deficit and about government's direct spending on investment are likely to have the largest impact on growth. Changes in incentives through tax policy for private saving and investment are less important.

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