to control, raising the possibility that savings will never be realized. more generally, i wonder whether there is enough funding slack to accommodate contingencies, or the inevitable new, but as yet unidentified, spending programs. budget forecasts are understandably subject to fairly large errors. seemingly small changes in receipts and outlays are magnified in the budget deficit. for example, during the 1990s, the average absolute error in the projections of february for receipts and outlays in the fiscal years starting the subsequent october has been greater than four percent. a four percent error in both outlays and receipts in opposite directions amounts to more than $ 125 billion annually. indeed, the uncertainty of budget forecasts is no better illustrated than by an admittedly extreme case. during the last two and a half years the projection of the fiscal balance, excluding new initiatives, for the year 2002 has changed by about $ 250 billion. while all this fortunately has been in the direction of smaller deficits, the degree of uncertainty suggests that the error could just as easily be on the other side. with this high level of uncertainty in projecting budget totals and associated deficits, the congress needs to evaluate the consequences to long - term economic growth of errors in fiscal policy. a base issue in such an evaluation is whether we are better off to be targeting a large deficit, balance, or a chronic surplus in our unified budget. there is nothing special about budget balance per se, except that it is far superior to deficits. i have always emphasized the value of a budgetary surplus in increasing national savings, especially when american private domestic savings is low, as it is today. higher national savings lead in the long run to higher investment and living standards. they also foster low inflation. low inflation itself may be responsible, in part, for higher productivity growth and larger gains in standards of living. if economic growth and rising living standards, fostered by investment and price stability, are our goal, fiscal policy in my judgment will need to be biased toward surpluses in the years immediately ahead. this is especially so given the inexorable demographic trends that threaten huge increases in outlays beyond 2010. we should view the recent budget agreement, even if receipts and outlays evolve as expected, as only an important downpayment on the larger steps we need to take to solve the harder problem - - putting our entitlement programs on a sound financial footing for the 21st century. moreover, targeted surpluses could hopefully

degree of acceleration of productivity growth that appears unlikely - - the imbalance between the growth in labor demand and the expansion of potential labor supply of recent years must eventually erode the current state of inflation quiescence and, with it, the solid growth of real activity. in this context, the economic outlook sketched out for the united states by both the office of management and budget and the congressional budget office is realistic, even in some sense conservative. but you should recognize the range of possible long - term outcomes, both significantly better or worse, has risen markedly in the last year. an acceleration of productivity growth, should it materialize, would put the economy on a higher trend growth path than they have projected. the development of inflationary pressures, on the other hand, would doubtless create an environment of slower growth in real output than that projected by omb or cbo. a re - emergence of inflation is, without question, the greatest threat to sustaining what has been a balanced economic expansion virtually without parallel in recent decades. in this regard, we at the federal reserve recognize that how we handle monetary policy will be a significant factor influencing the path of economic growth and, hence, fiscal outcomes. given the wider range of possible outcomes that we face for long - term economic growth, the corresponding ranges of possible budget outcomes over the next five to ten years also has widened appreciably. in addition to the uncertainties associated with economic outcomes, questions may be raised about other assumptions behind both projected receipts and outlays. with regard to the former, it is difficult to believe that our much higher - than - expected income tax receipts of late are unrelated to the huge increase in capital gains, which since 1995 have totaled the equivalent of one - third of national income. aside from the question of whether stock prices will rise or fall, it clearly would be unrealistic to look for a continuation of stock market gains of anything like the magnitude of those recorded in the past couple of years. on the outlay side, the recently enacted budget agreement relies importantly on significant, but as - yet - unspecified, restraints on discretionary spending to be made in the years 2001, 2002, and thereafter. supporters of each program expect the restraints to fall elsewhere. inevitably, the eventual publication of the detail will expose deep political divisions, which could make the realization of the budget projections less likely. in addition, while the budget agreement included significant cuts in medicare spending, past experience has shown us how difficult medicare is