unsustainable : without changes to taxes or spending, we may reach a point where ever - larger amounts of debt must be issued to pay ever - larger interest charges. to be sure, budget deficits are not always inappropriate, and to a certain extent, the recent fiscal deficits have helped limit the recent economic slowdown. but now that the recovery is well under way, it is important to concentrate on longer - run fiscal policy. specifically, it is time to bring the budget deficits under control. doing so will, of course, require action in the political arena. but the manner in which the process of deficit reduction is framed can strongly influence the likelihood of success. there are various ways to restore fiscal discipline. today i will discuss some of these approaches, focusing on their past performance and future potential. better information one approach is to provide the congress with better information about the fiscal situation and the costs of legislation. the first milestone in that effort was the congressional budget and impoundment control act of 1974. this act established the congressional budget office ( cbo ) to provide baseline projections of current and future revenues and outlays and to estimate the budgetary effect of spending proposals. the act named the joint committee on taxation ( jct ) as the official “ scorekeeper ” for revenue legislation. the cbo and the jct provide credible estimates of taxes, spending, and deficits based on a common set of assumptions. by establishing a sensible context in which the inevitable political struggles associated with setting budgetary priorities can take place, this information significantly affects the budget process and, ultimately, budget outcomes. many analysts have worried about deficiencies in the concepts underlying the official budget estimates. apart from a few exceptions, budget estimates are based on cash accounting. thus, they do not take into account the accrual of future obligations or revenues and do not offer an accurate picture of the entire fiscal situation. for example, by today ’ s cash - based yardstick, the federal budget posted surpluses from 1998 to 2001 ; yet, if the budget definitions had included the costs of future medicare and social security benefits accrued over this period, the budget likely would have shown substantial deficits. similarly, if our measure of national debt had included the present value of our already accrued future liabilities for medicare and social security, the debt would never have been close to being paid off. in short, although cash deficits have economic relevance, they can provide a misleading picture of the nation

measures of the current fiscal situation stem from differences in their accounting for medicare and social security. it is no secret to the public or to members of the congress that these programs face long - term imbalances. this information has been widely known and studied in depth for many years. and yet, despite that fact, we still find ourselves on a fiscal trajectory that is probably unsustainable. better information alone does not seem to be the answer to our fiscal difficulties. typically, these are the types of assumptions used to provide long - term projections of the budget deficit or to calculate the long - term solvency of the social security system. to illustrate the uncertainty inherent in long - term projections, the cbos most recent long - term outlook report focused on six possible scenarios based on different assumptions about future revenues and spending. determining future policy for tax rates is not clear - cut either. under current law, tax revenues as a share of gdp will reach levels well above historical norms as real bracket creep pushes more and more income into the highest tax brackets. yet, most calculations of generational accounts assume that the tax law will be adjusted so that average tax rates remain constant over time. overall deficit targets a second approach to controlling budget deficits is for the congress to establish budget targets. this approach was the centerpiece of the balanced budget and emergency deficit control act of 1985 commonly known as the gramm - rudman - hollings ( grh ) act. that act aimed to wipe out the deficit in five years. it did so by establishing annual targets - declining to zero - for the budget deficit. the process worked as follows : if projected deficits in the next fiscal year exceeded the targets by $ 10 billion or more, the legislation mandated that unprotected programs be cut, across - the - board, and by enough to reach the legislated targets. this process of across - the - board cuts was known as “ sequestration ”. the law did not specify how the targets were to be reached ; instead, the assumption was that the existence of those targets and the threat of sequestration would be enough to get the congress and the administration to agree on a package of spending cuts and tax increases. grh did not allow changes in external circumstances to affect the budget deficit targets. spending cuts were to be enforced regardless of whether the deficit picture had deteriorated because of worsening economic circumstances or because of congressional action. the result of this legislation was quite different than originally envisioned.