alan greenspan : budget policy remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, to the federal reserve bank of philadelphia policy forum, philadelphia, pennsylvania, ( videotaped remarks ), 2 december 2005. * * * the u. s. economy has delivered a solid performance thus far in 2005. and, despite the disruptions of hurricanes katrina, rita, and wilma, economic activity appears to be expanding at a reasonably good pace as we head into 2006. however, the positive short - term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget over the longer run. to be sure, the current pace of the ramp - up in spending on defense and homeland security is not expected to continue indefinitely. but, as the latest projections from the administration and the congressional budget office suggest, our budget position will substantially worsen in the coming years unless major deficit - reducing actions are taken. as i recently testified, the necessary choices will be especially difficult to implement without the restoration of procedural restraints on the budget - making process. for about a decade, the rules laid out in the budget enforcement act of 1990 and in the later modifications and extensions of the act helped the congress establish a better fiscal balance. however, the brief emergence of surpluses in the late 1990s eroded the will to adhere to these rules of restraint. the rules were aimed specifically at promoting deficit reduction rather than at the broader goal of setting out an agreed - upon standard for determining whether the nation was living within its fiscal means. by the end of the decade, many of the rules that helped constrain budgetary decisionmaking earlier in the 1990s - - in particular, the limits on discretionary spending and the paygo requirements - - were being violated with increasing frequency ; finally, in 2002, they were allowed to expire. reinstating a structure like the one formerly provided by the budget enforcement act of 1990 would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process. such a step would be even more meaningful if it were coupled with the adoption of provisions for dealing with unanticipated budget outcomes. as you are well aware, budget outcomes have often deviated from projections - - in some cases, significantly - - and they will continue to do so. accordingly, well - designed mechanisms that facilitate midcourse corrections would ease the task of bringing the budget back into line when it goes awry. in

with a lag, also raise benefits under current law. moreover, because the long - range budget assumptions already make a reasonable allowance for future productivity growth, one cannot rule out the chance that productivity growth will fall short of projected future averages. in fiscal year 2005, federal outlays for social security, medicare, and medicaid totaled about 8 percent of gross domestic product. the long - run projections from the office of management and budget suggest that the share will rise to 9 - 1 / 2 percent by 2015 and to about 13 percent by 2030. so long as health - care costs continue to grow faster than the economy as a whole, they will exert budget pressures that seem increasingly likely to make current fiscal policy unsustainable. the likelihood of growing deficits in the unified budget is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an everlarger shadow over the growth of living standards. the broad contours of the challenges ahead are clear. but considerable uncertainty remains about the precise dimensions of the problem and about the extent to which future resources will fall short of our current statutory obligations to the coming generations of retirees. we already know a good deal about the size of the adult population in, say, 2030. almost all who will be in that population have already been born. thus, forecasting the number of social security and medicare beneficiaries is fairly straightforward. so, too, is projecting future social security benefits, which are tied to the wage histories of retirees. however, the uncertainty about future medical spending is daunting. we know very little about how rapidly medical technology will continue to advance and how those innovations will translate into future spending. consequently, the range of possible outcomes for spending per medicare beneficiary expands dramatically as we move into the next decade and beyond. technological innovations can greatly improve the quality of medical care and can, in some instances, reduce the costs of existing treatments. but because technology expands treatment possibilities, it also has the potential to add to overall spending - - in some cases, by a great deal. other sources of uncertainty - - for example, the extent to which longer life expectancies among the elderly will affect medical spending - - may also turn out to be important. as a result, the range of future possible outlays per recipient is extremely wide. the actuaries'projections of medicare costs are, perforce, highly