payroll tax cuts and emergency unemployment benefits. the expiration of the tax cuts enacted in 2001, 2003 and 2009 and other tax provisions. the constraints on the budget control act last year and the winding down of the budget effects of the 2009 recovery act. taking together, those will generate a sharp fiscal contraction. in addition, the number of houses and loss of wealth and run up of debt and other down turns in the economy are continuing to weigh on the household and business spending. if you look at the first chart in the packet, we project gdp will grow by 1% this year and 1% next year. real gdp will remain below the economy's potential through 2017. according to our projections, the economy is only about halfway through the cumulative

shortfall from the recession and aftermath. the costs associated with the output gap are immense. they are built by people losing jobs and displaced from their homes or own businesses that fail. in particular, the labor market has a great deal of slack. mainly as a consequence of weakness in demanded for business and ver services. our forecast remains above 8% this year and next. the unemployment rate declines in our projection, but remains above 7% at 2015 before dropping at the end of the decade. the economy continues to be weak in the next few years, inflation and interest rates will remain low. let me turn now to the budget projections. in the next slide, under current law, the deficit will be $1.1

trillion. that is 2% points less than last year. still larger from 1948 to 2008. over the next few years, projected deficits in the baseline narrow gdp and totaling $3 trillion. debt held by the public drops by a little, but remains quite high. much of the projected decline occurs because under current law revenues will rise considerably. in particular, between 2012 and 2014, revenues shoot up by more than 30% in the baseline because of the recent or scheduled tax propvisiope provisions. federal spending in the baseline declines modestly in the next few years as the economy

expands. later in the decade, spending turns up again relative to gdp because of expenses generating by the aging population and rise in health care and the accumulation of debt and rising interest rates will cause a surge in the government's interest costs. of course, these baseline projections are influenced by the changes in tax and spending policies in current law. it is a significant departure from recent policies. to illustrate the budget consequences of maintaining some tax and spending policies that have recently been in effect. cbo has objections in a scenario. look at the next slide. that scenario incorporates the following, first recent that all expiring tax provisions are extended. second, that the alternative minimum tax is indexed for

inflation after 2011. third, that medicare payment rate for doctor services remain at current level rather than dropping. and fourth, that the automatic spending reductions required by the act do not take effect. although the scenario assumes the original caps on discretionary spending remains in place. the next slide shows under that alternative fiscal scenario, deficits over the 2013 and 2022 period would be far higher than in the baseline. averaging 5.5% of gdp rather than 1.5%. and totaling $1.1 trillion. the following slide shows that the debt held by the public will climb by an unsustainable path reaching 94% of gdp in 2022. the highest figure since just

after the second world war. this scenario is not a prediction or a recommendation. we put it together to illustrate the effects of the alternative set of policies. under that scenario, the economy would be stronger than under current law, but noticeably weaker later in the decade. we use range of numbers to reflect the uncertainty involved. the mid point of the range for the end of 2013 show gdp that is 2% higher and unemployment rate that is 1% lower than would be the case under current law. however, the midpoint for 2022 shows gdp lower than current law because of the crowding out of investment would be caused by the escalating debt. it bears emphasis that the projecting economic outcomes that would result is very

difficult. many things could happen to cause the economy and the budget to turn out better or worse than we project. however, there is no plausible economic outcome under which the alternative fiscal scenario would lead to a sustainable budget outcome. the fundamental fiscal challenge as both senator toomey and chairman noted are reasons for the rising cost of health care. the aging population will increase by one-third in the coming decade. raising the cost of social security, medicare and medicaid. in addition, the an ford able care act will increase the number of non elderly people needing assistance. the costs per enrollee will continue to rise as well as health care costs. both over the coming decade and

beyond. because of the forces, the set of budget policies that were in effect in the past cannot be maintained in the future. we turn to the next slide. we offer one way to think about the problem. using cbo projections under the alternative fiscal scenario which is a continuation of the recent and current policies. in this bar chart, each bar represents a component of the federal budget. the left bar showing the average of the past 40 years and the right bar the projection of 2022 in the scenario. in the scenario, outlays for social security and the health care programs, the first set of bars are much higher than the past. 5.5% of gdp than the past 40 years. outlays for other programs, military and non-military,

outlays for all of the programs together are projected to be lower than in the past. 8% of gdp. that is below in the year than the past 40 years. yet, the budget deficit under this scenario on the far right is projected to be 6.1% of gdp. as i have shown under that scenario, debt rises rapidly relative to gdp. to keep debt from rising,s deficit would need be to 3.5% in 2022 under this scenario projection. that is $900 billion in 2022 alone relative to this scenario. therefore to put the government on the sustainable path, we need revenues to increase higher than gdp over the past 40 years or

make large changes to social security or medicare. let me close by highlights the consequence al choices. if policymakers leave things unchanged, you will recede to the size of the economy. that will occur because of the large increase of revenues and sharp restraints on the programs i highlighted. those will have significant economic and social affects. the market will slow the recovery. changing current laws would boost the economy and allow people to pay less in taxes and benefit in the next few years, but would put the nation on an unsustainable fiscal course. if policymakers wanted to

achieve a boost and long-term sustainability, they need to enact to leave wider than our current law baseline than the next few years, but significantly narrower than under our alternative scenario by later in the decade. in conclusion, how much and how quickly the budget deficit declines depends on how the economy does over the decade. probably more critical are the choices by your colleagues as you face the changes to the tax and spending policies that will take place later this year. thank you. i'll take questions. >> thank you, dr. elmendorf. let me start out by saying you said repeatedly that we are on the budget track that is unsustainable. deficits are too high. too much debt. but you also say in this report

that if we let the tax cuts expire as is provided for in current law and if we impose the spending cuts required by current law, economic growth, according to your analysis will actually plunge. we started out senator toomey and i agreeing on one thing. we have to have policies that strengthen economic growth. and yet you are saying that current law which ends the bush-era tax cuts at the end of this year and current law also imposes spending cuts, sequestration that is in line, that would cut about half. is that correct? >> yes, that is right, mr. chairman. >> so, you know, i think it is

very confusing to people because it sounds like double talk to them. how can it be that in the one hand we are saying deficits and debts are a big problem, but on the other hand, if we cut spending and raise revenue, which over time will reduce deficits, but if we did it now, it will dramatically reduce economic growth and make our economic situation worse. how can both those things be true? >> as you know, mr. chairman, it is not double talk but it is complicate complicated. in the short-term, especially given the state of the economy today, the constraint on output and jobs is really the demand for goods and services which plummeted in the financial crisis and recession. it is only slowly coming back. over the medium term and long-term, the constraint on the

economy is not particularly the demand for goods and services. it is the ability to supply the goods and services. it is the quantity of capital with which they work. the productivity which is combined to produce output. this is a consensus part of economic thinking. in the short-term, any economies that have a lot of under used and unused people, factories and houses and so on, that efforts to boost the demand for services can help people back to work. over time, the bigger issue is if people are saving and can come to work and find jobs. so, what countries have found is that very rapid imposition of fiscal restraint tends, not always, tends to slow economies in the short-term. some countries have no choice. i'm not trying to second guess the decisions made by

policymakers in europe. when countries cannot sell their debtor fear they may not be able to sell their debt tomorrow, then they sometimes need to make drastic changes overnight. in our issue brief of the risk of fiscal crisis years ago, we highlighted if we wait to address the fiscal problems until the creditors don't lend money anymore, it is hardest to address the problem. once countries have gotten to that point, sometimes they have no choice, but to make the overnight change. if one can plan ahead, then it helps households and businesses and state and local governments to adjust to the changing policies. i want to say this is not an argument for deferring decision making. there really isn't a down side to the congress deciding how it wants to put the country on sustainable fiscal path. the issue is given a plan, how

quickly should the pieces take effect and there are reasons for waiting. there are reasons for not waiting too long. we written a lot and talked a lot about the dangers of the escalating debt. >> so, why wouldn't one conclude from what you've said here that the best policy in the short-term would be to extend tax cuts, at least some significant part of the tax cuts and defer some of the spending cuts, for example, part of the sequester for several years, but right now agree to a plan that will raise revenue and cut spending so that at the end of

the ten years we have dramatically reduced deficits and reduced the growth of debt? >> i don't want to speak to a specific combination of policies that you choose to extend or expire. as you know, the review of the stimulus effects for output of employment for the specific sets of policies. on your general point, i think agreement about how the country's budget will be put on a sustainable path will be a good thing for the economy in the short run. it will give people confidence because they knew where policies were headed. that is hard to have in the current environment. if the set of policies was put in place that put the country on a sustainable fiscal path and people believe those would be allowed to take effect when they were scheduled to do so, then i think that would be a good thing for business investment and hiring and consumer and spending. it would help to boost the economy right away. >> wouldn't the logical

conclusion of the testimony you provided be that in the short-term, we should take steps that might actually increase the deficits and debt if that was married with the longer-term plan that credibly reduced debt? >> yes. the policies that widen the deficit relative to the sharp fiscal restraint, the policies that widen for a few years would be beneficial for the economy over that period. especially if they were combined with a plan that later narrowed deficits relative to the current policy projections that we have shown you here. combining those pieces is important because people might

otherwise interpret short-term widening of the deficit as a precursor for widening down the road. the pieces would provide the strongest boost to economic activity in the short-term. >> the longer steps to deal with debt would have to be credible and an assurance that they are put in place? >> yes. i think we have written and said in previous testimonies to make intended future actions matter for people's behavior today, they need to be credible. they need to be specific and they need to have, i think, reasonably widespread support so people didn't think that they would be quickly overturned down the road. >> senator toomey. >> thank you very much, mr. chairman. i think one of the problems with

the solution along the lines of what you have described arises from the fact that, of course, the only congress we control is the one we are a member of. >> we're not so sure about that. >> we're not so sure about that. the idea of widening the deficit on the promise it will be narrowed in the future is one that would be challenging for me to accept. that we have a good reason to believe it will actually be carried through. having said that, statutory changes in the architecture of the programs driving through this and bipartisan support and signed into law, those would tend to be enduring. i think we have reason to be confident that the changes in effect not tomorrow, but years down the road, could, in fact, solve the problem and be credible if they were done that way. just quickly on this vain.

in this discussion that you had with the chairman, i think sometimes there is a suggestion that from the point of and lower taxes are somehow equivalent because from a sort of kin sinnian demand side they provide a stimulus that provides economic growth. i understand that analysis, but i would suggest, i don't know if you agree or not, dr. almen del, there's one way that they differ, and lower tax on investment have an effect on economic growth, a positive effect that spu -- spending doesn't have. the extent to which lower marginal rates encourage more work, more savings, more investment, more risk taking in a way that more government spending does not. and that therefore while i can acknowledge the kinsinnian argument they're equivalent from

the demand side, they're not equivalent on the other side. >> you're correct, senator. even on the demand side, on the analysis we have done for this committee, different sorts of specific changes in tax policy or spending policy could have a very different effect we estimate on the economy in the short run. so within one of the categories not everything is alike. i think you're right to emphasize the incentive effects of changes and tax rates. certain aspects of government spending can differ as well. >> now, earler in, the chairman challenged my assertion that we have a spending problem and he observed that revenue is at a relatively low point, multiyear low as a percentage of gdp. but the tax regime that we have in place has been in place now for almost ten years. and it seems to me that the low

revenue number that we have as a percentage of gdp is a function of a weak economy. slow growth, lesser output, far more people unemployed and therefore not paying taxes, and that that is by far the main driver of why we don't have greater revenue coming from the current rate structure. is it your view that it's the economic slowdown has been a big driver of the decline in revenue as a percentage of gdp? >> yes, it has been the principal factor. and we might collect revenue from the tax base, but you're right about the sharp decline in taxable income. >> if you look at your alterative fiscal scenario in which you assume that the current rates remain in place, in fact, revenue returns to its historical norm. really within a few years it

exceeds the 18% of gdp that has been the historical average. so in that sense, we are on a course with the current tax rates for revenue to be normal again. at least normal as measured by america's history. >> yeah. >> what doesn't revert to normal is spending. spending remains at an elevated level of gdp inevitableaby and n it gets worse. >> yes. you highlighted the particular types of spending. >> that's why, you know, if you believe that fundamentally needs to be a greater share of our economy and taxes ought to be greater share than historically they have been, okay, that's perfectly legitimate point of view. but that's a departure from what has been the norm in this country for decades. the last point i would make on this, as recently as 2007 the current tax regime generated more than 18% of gdp in revenue

to the government, and a deficit of only 1.2% of gdp. a deficit that was adding to the debt at a rate slower than the economy was growing, and therefore, establishing that goal, what should be our goal of debt to gdp ratio that would be declining. >> yes. >> i'll yield, mr. chairman. >> let me pick up on the point because i think it's hugely important, and this is where we have a difference of opinion. average revenue over 40 years, about 18% of gdp. i think 18.1%. the problem with that is, there have been only been five times we have balanced in the last 30 years. every time we've balanced, revenue was not at 18 or 19%. revenue was at 19.6%, 19.7%,

19.8%, 20.6%. and that's before the demographic time bomb that's going on in this country. the aging of the baby boom and that's not a projection. they're born, they're alive today, they'll be eligible for medicare and social security. so that to me has gotten to taken into account on what kind of revenue level we need to achieve to take on this debt threat and have the kinds of medicare, social security programs that the vast majority of americans say they support. i entirely agree with the senator, the spending is going to have to come down. in nominal terms, in real terms, because it is at or near a 60-year high. but i personally don't believe we're going to achieve agreement to make changes on entitlements if we don't also make changes on the revenue side.

and i for one, i'm ready to deal with entitlements. i think it's entirely clear to me that what we have been doing so far is trying to solve this on a discretionary side of the equation, senator quite appropriately mentioned what's happening there. that spending is actually going down and going down quite markedly. but we have not been able to deal with the entitlement side. so senator stabenow? >> thank you as always for your thoughtful perspective and mr. el elmendorf we thank you and your team for your work. i think what you're saying is we needed the supercommittee to work, we need a long-term plan that both deals with the short term in terms of what is happening with jobs.

we know we'll never get out of debt with 13 million people out of work, but we have to focus on the long term. i want to thank you for that. just to reiterate, thank you for your work on the budget control act and in fact it may have been a little different process, but we did pass a budget last year. just for the record and i think there's been a manufactured political issue around whether or not it was done in the normal process or through something called the budget control act, but it certainly was done with budget caps and we can go further this year. but we certainly put in place both a budget framework and appropriations. within that, let me also just say for a moment that we in agriculture did our part and just because we did a lot of hard work together with cbo i want to thank you very much for burning the late-night candles.

people who were in your shop working with us around the clock, we made a commitment that chairman lucas and i and senator roberts and congressman piercen to come up with a bipartisan, bicameral deficit reduction proposal. we did that. we're very proud that we did that. agriculture is slightly less than 2% of the outlays and the $20 billion that we recommended with cbo scoring and legislative language was slightly less than 2% of the cut required. so we met our fair share and i want to thank your staff for all the efforts. >> thank you, senator, i'll pass that along. >> yes. let me speak on a couple of other things i want to ask a question, but let me also say when we look long term, i think it's important for us also to look at the fact that we have begun to tackle some things within the affordable care act. we tackled overpayments on medicare advantage some said it wouldn't work.

i'm very pleased to see the numbers that have come out for 2011 that premiums are down 7%. even though enrollment is up 10%. so we're beginning that projection that came from your shop of $143 billion over ten years in reduction in healthcare costs. it looks like it's beginning to happen. the second decade i understand was half a percentage of gdp which is $1.3 trillion. i'm pleased to see in part there's more that needs to be done, but which was done under the affordable care act certainly has moved us in a direction of bringing down costs. i'm pleased to see that. i'd like to ask you about the economy and certainly in the short run. you know, coming from michigan, we have had the biggest swing. three years ago we were tapped out at 15.7%