closed at the end of last month, the u. s. federal government's budget deficit shrank, as federal tax revenues came in at a greater - than - expected pace. although the final accounting for the fiscal year is yet to be tallied, treasury data indicate that the federal budget deficit was probably equal to about 2 - 1 / 2 percent of gdp - - below its level of about 3 - 1 / 2 percent of gdp in the preceding two years. that said, the budget figures for the fiscal year just ended were little affected by the fiscal policy response to the recent hurricanes. only a small portion of the emergency federal outlays budgeted for hurricane relief were actually spent in september, the last month of the fiscal year. the bulk of the hurricane - related spending and tax relief will show up in the budget accounts in the current and next fiscal years. moreover, the total magnitude of the federal response is still unknown, adding to the uncertainty associated with the fiscal outlook. viewed from a longer - term perspective, the financial position of the u. s. federal budget has oscillated dramatically over the past ten years. ten years ago, the federal budget had a deficit that amounted to about 2 - 1 / 2 percent of gdp, roughly similar to the current percentage, and forecasts at that time pointed to some widening in this budget gap in future years. budget agreements in earlier years - - 1990 and 1993 - - had both raised taxes and reduced spending, and the combination of these actions had helped lower the federal budget deficits from the levels of previous years. these budget agreements demonstrated the desire of policymakers to undertake some hard steps necessary to reduce the deficit. they had also put in place caps on so - called discretionary federal spending - - that is, the portion of federal spending that is allocated annually - - and had required that legislative changes to taxes or entitlement spending be deficit neutral, a requirement called the paygo rule. the paygo rule mandated that changes in taxes or entitlement spending be offset by other changes in taxes or entitlement spending so that the deficit was not increased. despite the enactment of deficit - reducing legislation and the existence of these budget rules, the best estimates ten years ago had the federal budget still running deficits far into the future. however, as it turned out, a number of positive developments pushed the budget into surplus in 1998 through 2001. importantly, bipartisan support in the congress for establishing and maintaining some measure of

mark w olson : update on the us economy and fiscal outlook speech by mr mark w olson, member of the board of governors of the us federal reserve system, at the fraser institute roundtable luncheon, vancouver, 12 october 2005. * * * thank you for inviting me to speak to you today. my remarks will focus on the near - term economic outlook of the united states in the immediate post - hurricane aftermath. then i will address the fiscal challenges that the country confronts. as always, and perhaps even more so this time, i will be speaking for myself and not necessarily for my colleagues at the federal reserve. in july, when i accepted your invitation to speak, i chose as my title " update on the u. s. economy. " on the basis of how the u. s. economy was performing around midsummer, i anticipated that an october presentation on the economy would be quite positive. at that time, the first - quarter increase in real gdp had been revised up to almost 4 percent, and after a slightly softer second quarter, most estimates pointed to another increase in the 4 percent range or higher for the third quarter. the economy was generating, on average, 175, 000 private nonfarm jobs per month, and the unemployment rate was down to 5 percent. core consumer price inflation was running at about 2 percent. in short, at midyear, the u. s. economy appeared to be on firm footing, and inflation appeared to be well contained. canada's economy appeared to be in a roughly similar position, as inflation was running at about 2 percent - - approximately the midpoint of the bank of canada's inflation - target band - and the unemployment rate at about 6 - 3 / 4 percent. as always, the positive picture in the united states was not without potential risks, and the chairman noted them in his midyear report to the congress : rising prices of energy and other commodities had put upward pressure on costs. labor costs had also picked up. already lofty housing prices that allowed homeowners to convert equity appreciation into consumption continued to rise and in some markets had reached levels that our chairman had described as " frothy. " on balance, the fomc continued to believe that policy accommodation could be removed at a measured pace. however, the committee noted that it would need to be alert to inflationary pressures and would respond to changes in economic prospects as required to fulfill its obligation to maintain price stability. an additional benefit of the solid economic