aspect of the budget and its economic impact. the unified budget deficit, projected forward a certain number of years, is an important measure that is already included in the congressional budgeting process. however, the unified budget deficit does not fully capture the fiscal situation and its effect on the economy, for at least two reasons. cbo ( 2005 ), the long - term budget outlook, p. 3. i discussed this issue in ben s. bernanke ( 2006 ), " the coming demographic transition : will we treat future generations fairly? ", speech delivered before the washington economic club, washington, october 4, www. federalreserve. gov / boarddocs / speeches / 2006 / 20061004 / default. htm. first, the budget deficit by itself does not measure the quantity of resources that the government is taking from the private sector. an economy in which the government budget is balanced but in which government spending equals 20 percent of gdp is very different from one in which the government's budget is balanced but its spending is 40 percent of gdp, as the latter economy has both higher tax rates and a greater role for the government. monitoring current and prospective levels of total government outlays relative to gdp or a similar indicator would help the congress ensure that the overall size of the government relative to the economy is consistent with members'views and preferences. second, the annual budget deficit reflects only near - term financing needs and does not capture longterm fiscal imbalances. as the most difficult long - term budgetary issues are associated with the growth of entitlement spending, a comprehensive approach to budgeting would include close attention to measures of the long - term solvency of entitlement programs, such as long - horizon present values of unfunded liabilities for social security and medicare. to summarize, because of demographic changes and rising medical costs, federal expenditures for entitlement programs are projected to rise sharply over the next few decades. dealing with the resulting fiscal strains will pose difficult choices for the congress, the administration, and the american people. however, if early and meaningful action is not taken, the u. s. economy could be seriously weakened, with future generations bearing much of the cost. the decisions the congress will face will not be easy or simple, but the benefits of placing the budget on a path that is both sustainable and meets the nation's long - run needs would be substantial. thank you again for allowing me to comment on

5 under these assumptions, the cbo calculates that, by 2030, the federal budget deficit will approach 9 percent of gdp - more than four times greater as a share of gdp than the deficit in fiscal year 2006. a particularly worrisome aspect of this projection and similar ones is the implied evolution of the national debt and the associated interest payments to government bondholders. minor details aside, the federal debt held by the public increases each year by the amount of that year's unified deficit. consequently, scenarios that project large deficits also project rapid growth in the outstanding government debt. the higher levels of debt in turn imply increased expenditures on interest payments to bondholders, which exacerbate the deficit problem still further. thus, a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits. according to the cbo projection that i have been discussing, interest payments on the government's debt will reach 4 - 1 / 2 percent of gdp in 2030, nearly three times their current size relative to national output. under this scenario, the ratio of federal debt held by the public to gdp would climb from 37 percent currently to roughly 100 percent in 2030 and would continue to grow exponentially after that. the only time in u. s. history that the debt - to - gdp ratio has been in the neighborhood of 100 percent was during world war ii. people at that time understood the situation to be temporary and expected deficits and the debt - to - gdp ratio to fall rapidly after the war, as in fact they did. in contrast, under the scenario i have been discussing, the debt - to - gdp ratio would rise far into the future at an accelerating rate. ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both. the cbo projections, by design, ignore the adverse effects that such high deficits would likely have on economic growth. but if government debt and deficits were actually to grow at the pace envisioned by the cbo's scenario, the effects on the u. s. economy would be severe. high rates of government for example, in 2030, five of the six scenarios imply deficits ranging from 1 - 1 / 2 percent of gdp to nearly 14 percent of gdp ; a sixth scenario is capable of producing a surplus, but it relies on the confluence of a very favorable