years ahead. like many private forecasters, the cbo and the office of management and budget assume that productivity growth will drop back somewhat from the recent stepped - up pace. but a distinct possibility, as i pointed out earlier, is that the development and diffusion of new technologies in the current wave of innovation may still be at a relatively early stage and that the scope for further acceleration of productivity is thus greater than is embodied in these budget projections. if so, the outlook for budget surpluses would be even brighter than is now anticipated. but there are significant downside risks to the budget outlook as well. one is our limited knowledge of the forces driving the surge in tax revenues in recent years. of course, a good part of that surge is due to the extraordinary rise in the market value of assets which, as i noted earlier, cannot be sustained at the pace of recent years. but that is not the entire story. these relationships are complex, and until we have detailed tabulations compiled from actual tax returns, we shall not really know why individual tax revenues, relative to income, have been even higher than would have been predicted from rising asset values and bracket creep. thus, we cannot rule out the possibility that this so - called “ tax surprise ”, which has figured so prominently in the improved budget picture of recent years, will dissipate or reverse. if this were to happen, the projected surpluses, even with current economic assumptions, would shrink appreciably and perhaps disappear. such an outcome would be especially likely if adverse developments occurred in other parts of the budget as well - for example, if the recent slowdown in health care spending were to be followed by a sharper pickup than is assumed in current budget projections. another consideration that argues for letting the unified surpluses build is that the budget is still significantly short of balance when measured on an accrual basis. if social security, for example, were measured on such a basis, counting benefits when they are earned by workers rather than when they are paid out, that program would have shown a substantial deficit last year. the deficit would have been large enough to push the total federal budget into the red, and an accrual - based budget measure could conceivably record noticeable deficits over the next few years, rather than the surpluses now indicated by the official projections for either the total unified budget or the on - budget accounts. such accruals take account of still growing contingent liabilities that,

under most reasonable sets of actuarial assumptions, currently amount to many trillions of dollars for social security benefits alone. even if accrual accounting is set aside, it might still be prudent to eschew new longer - term, potentially irreversible commitments until we are assured that the on - budget surplus projections are less conjectural than they are, of necessity, today. allowing surpluses to reduce the debt to the public, rather than for all practical purposes irrevocably committing to their disposition in advance, can be viewed as a holding action pending the clarification of the true underlying budget outcomes of the next few years. debt repaid can very readily be reborrowed to fund delayed initiatives. more fundamentally, the growth potential of our economy under current circumstances is best served, in my judgment, by allowing the unified budget surpluses presently in train to materialize and thereby reduce treasury debt held by the public. yet i recognize that growing budget surpluses may be politically infeasible to defend. if this proves to be the case, as i have also testified previously, the likelihood of maintaining a still satisfactory overall budget position over the longer run is greater, i believe, if surpluses are used to lower tax rates rather than to embark on new spending programs. history illustrates the difficulties of keeping spending in check, especially in programs that are open - ended commitments, which too often have led to larger outlays than initially envisioned. decisions to reduce taxes, however, are more likely to be contained by the need to maintain an adequate revenue base to finance necessary government services. moreover, especially if designed to lower marginal rates, tax reductions can offer favorable incentives for economic performance. conclusion as the us economy enters a new century as well as a new year, the time is opportune to reflect on the basic characteristics of our economic system that have brought about our success in recent years. competitive and open markets, the rule of law, fiscal discipline, and a culture of enterprise and entrepreneurship should continue to undergird rapid innovation and enhanced productivity that in turn should foster a sustained further rise in living standards. it would be imprudent, however, to presume that the business cycle has been purged from market economies so long as human expectations are subject to bouts of euphoria and disillusionment. we can only anticipate that we will readily take such diversions in stride and trust that beneficent fundamentals will