Today there is widespread frustration with the budget process. It is attacked as confusing, time-consuming, burdensome, and repetitive. In addition, the results are often disappointing to both participants and observers. Although frustration is nearly universal, there is less agreement on what specific changes would be appropriate. This is not surprising. It is in the budget debate that the government determines in which areas it will be involved and how it will exercise that involvement. Disagreement about the best process to reach such important decisions and how to allocate precious resources is to be expected. We have made several proposals based on a good deal of GAO work on the budget, including the structure of the budget and the budget process.These proposals emphasize the need to improve the recognition of the long-term impact of today’s budget decisions and advance steps to strengthen or better ensure accountability. In previous reports and testimonies, we have said that the nation’s economic future depends in large part upon today’s budget and investment decisions. Therefore, it is important for the budget to provide a long-term framework and be grounded in a linkage of fiscal policy with the long-term economic outlook. This would require a focus both on overall fiscal policy and on the composition of federal activity. In previous reports, we have cautioned that the objective of enhancing long-term economic growth through overall fiscal policy is not well served by a budget process which focuses on the short-term implications of various spending decisions. It is important to pay attention to the long-term overall fiscal policy path, to the longer-term implications of individual programmatic decisions, and to the composition of federal spending. very short term, planning for longer-range economic goals requires exploring the implications of budget decisions well into the future. By this, we do not mean detailed budget projections could be made over a 30-year time horizon, but it is important to recognize that for some programs a long-term perspective is critical to understanding the fiscal and spending implications of a decision. The current 5-year time horizon may work well for some programs, but for retirement programs, pension guarantees, and mortgage-related commitments—for example—a longer-time horizon is necessary. Although the surest way of increasing national savings and investment would be to reduce federal dissaving by eliminating the deficit, the composition of federal spending also matters. We have noted that federal spending can be divided into two broad categories based on the economic impact of that spending—consumption spending having a short-term economic impact and investment spending intended to have a positive effect on long-term private sector economic growth. We have argued that the allocation of federal spending between investment and consumption is important and deserves explicit consideration. However, the current budget process does not prompt the executive branch or the Congress to make explicit decisions about how much spending should be for long-term investment. The budget functions along which the resolution is structured represent one categorization by “mission,” but they are not subdivided into consumption and investment. Appropriations subcommittees provide funding by department and agency in appropriations accounts that do not distinguish between investment and consumption spending. In short, the investment/consumption decision is not one of the organizing themes for the budget debate. We have suggested that an appropriate and practical approach to supplement the budget’s focus on macroeconomic issues would be to incorporate an investment component within the discretionary caps set by BEA. Such an investment component would direct attention to the trade-offs between consumption and investment but within the overall fiscal discipline established by the caps. It would provide policymakers with a new tool for setting priorities between the long term and the short term. Within the declining unified budget deficit path, a target for investment spending could be established for the appropriate level of investment to ensure that it is considered formally in the budget process. In addition to changes aimed at improving the focus on the long term, we have continued to emphasize the importance of enforceability, accountability, and transparency. We describe these three elements together because it is difficult to have accountability without an enforcement mechanism and without transparency to make the process understandable to those outside it. Accountability in this context has several dimensions: accountability for the full costs of commitments that are to be made and accountability for actions taken—which requires targeting enforcement to actions. In addition, it may encompass the broader issue of taking responsibility for responding to unexpected events. Transparency is important not only because in a democracy the budget debate should be accessible to the citizenry but also because without it, there can be little ultimate accountability to the public. In this area, as in others I discuss today, there has been progress. For example, enforcement provisions in BEA have worked within their scope: the discretionary caps and controls on expanding entitlements have held. The design of the law has provided accountability for the costs of actions taken and for compliance with rules. However, accountability for the worse-than-expected deficits in the past has been diffuse. For credibility and for success, we need to consider bringing more responsibility for the results of unforeseen actions into the system. We have previously suggested that Congress might want to consider introducing a “lookback” into its system of budgetary controls. Under such a process, the current Congressional Budget Office (CBO) deficit projections would be compared to those projected at the time of a prior deficit reduction agreement and/or the most recent reconciliation legislation. For a difference exceeding a predetermined amount, the Congress would decide explicitly—through a vote—whether to accept the slippage or to act to bring the deficit path closer to the original goal by mandating actions to narrow this gap. required to recommend whether none, some, or all of the overage should be recouped. The Congress could be required to vote either on the President’s proposal or an alternative one. Neither of these “lookback” processes determine an outcome; both seek to increase accountability for decisions about the path of federal spending. Taken together, the changes we have suggested, which could be made within the current budget process, would move us toward increased focus on important decisions and increased accountability for those decisions. Also, as discussed below, additional financial reporting and management reforms underway hold tremendous potential for helping to improve greatly the quality of information available to further enhance budget decision-making. The budget should be formulated using accurate and reliable financial data on actual spending and program performance. Audited financial statements and reports ought to be the source of these data. Ideally, we should expect such reports to address (1) the full costs of achieving program results, (2) the value of what the government owns and what it owes to others, (3) the government’s ability to satisfy future commitments if current policies were continued, and (4) the government’s ability to detect and correct problems in its financial systems and controls. Unfortunately, financial accounting information to date has not always been reliable enough to use in federal decision-making or to provide the requisite public accountability for the use of taxpayers’ money. Good information on the full costs of federal operations is frequently absent or extremely difficult to reconstruct and reliable information on federal assets and liabilities is all too often lacking. While GAO has been actively urging improvements in this area for over 20 years, complete, useful financial reporting is not yet in place. The good news is that tools are now being put in place that promise to get the federal government’s financial house in order. First, beginning for fiscal year 1996, all major agencies, covering about 99 percent of the government’s outlays, are required to prepare annually financial statements and have them audited. Second, an audited governmentwide financial statement is required to be produced every year starting with fiscal year 1997. Third, FASAB is recommending new federal accounting standards that will yield more useful and relevant financial statements and information. The basis for much of this progress is the CFO Act’s requirements for annual financial statement audits. Audits for a select group of agencies under the Act’s original pilot program highlighted problems of uncollected revenues and billions of dollars of unrecognized liabilities and potential losses from such programs as housing loans, veterans compensation and pension benefits, and hazardous waste cleanup. Such audits are bringing important discipline to agencies’ financial management and control systems. Thanks to the benefits achieved from these pilot audits, the Congress extended this requirement, in the 1994 Government Management Reform Act, to the government’s 24 major departments and agencies. That act also mandated an annual consolidated set of governmentwide financial statements—to be audited by GAO—starting for fiscal year 1997. These statements will provide an overview of the government’s overall costs of operations, a balance sheet showing the government’s assets and liabilities, and information on its contribution to long-term economic growth and the potential future costs of current policies. These reports will provide policymakers and the public valuable information to assess the sustainability of federal commitments. The CFO Act also went beyond these auditing and reporting requirements to spell out an agenda of other long overdue reforms. It established a CFO structure in 24 major agencies and the Office of Management and Budget (OMB) to provide the necessary leadership and focus. It also set expectations for the deployment of modern systems to replace existing antiquated, often manual, processes; the development of better performance and cost measures; and the design of results-oriented reports on the government’s financial condition and operating performance by integrating budget, accounting, and program information. measures into the reports and developing reports more specifically tailored to the government’s needs. The creation of FASAB was the culmination of many years of effort to achieve a cooperative working relationship between the three principal agencies responsible for overall federal financial management—OMB, Treasury, and GAO. Its establishment represents a major stride forward because financial management can only improve if these principal agencies involved in setting standards, reporting, and auditing work together. As you know, FASAB was established in October 1990 by the Secretary of the Treasury, the Director of OMB, and me to consider and recommend accounting principles for the federal government.