Budget deficits trouble Fed chief

Greenspan says deep cuts are preferable to raising taxes

Implies benefits for elderly on the table


WASHINGTON - Alan Greenspan, chairman of the Federal Reserve, warned yesterday that the federal budget deficits are "unsustainable" and urged Congress to act, preferably by cutting spending.

He warned that the deficits could be driven even higher by costs connected to the aging of the baby boom generation, particularly entitlement programs such as Social Security and Medicare. While reiterating his support for President Bush's plan to offer private accounts as part of overhauling Social Security, Greenspan urged lawmakers to tackle the program's problems now, rather than later.

The assessment was Greenspan's gloomiest to date about the government's budget straits. Unless Congress takes major actions to reduce the deficits, preferably, he said, by deep spending cuts, annual budgetary shortfalls would continue, and closing those gaps would become even more difficult.

Though Greenspan has made similar pleas before, he spoke more urgently yesterday and disagreed more adamantly with Republican lawmakers and the president, who have refused to put restrictions on new tax cuts.

"Addressing the government's own imbalances will require scrutiny of both spending and taxes," Greenspan told members of the House Budget Committee. "However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base."

The Fed chairman emphasized that his preference was to reduce deficits by cutting spending rather than raising taxes. But he said the "overriding principle" was to reduce the deficit, making compromise essential. "It's the principle that I think is involved here, namely that you cannot continuously introduce legislation which tends to expand the budget deficit."

The Fed chairman's tone was noticeably more urgent than last year or even in congressional hearings a few weeks ago. "When you begin to do the arithmetic of what the rising debt level implied by the deficits tells you, and you add interest costs to that ever-rising debt, at ever-higher interest rates, the system becomes fiscally destabilizing," he told lawmakers.

White House officials played down Greenspan's remarks, noting that he had placed priority on reduced spending and that Bush has vowed to reduce the deficit by half by 2009.

"The president does have a substantial deficit-reduction package," said Trent Duffy, a White House spokesman. "His budget is a continuation of that policy, and he looks forward to working with Congress in cutting that spending down. Likewise, the president agrees that the long-term budget is the issue, which is why he's trying to lead a national discussion and reform movement to save and strengthen Social Security."

Greenspan's comments deepened a long-running disagreement between the Federal Reserve and the White House, and came as House and Senate leaders are trying to negotiate a blueprint for tax and spending bills this year.

Greenspan, a Republican, has long argued that Congress should reinstate rules that would require lawmakers to offset the cost of both tax cuts and new spending programs with savings in other areas.

Bush and his GOP allies in Congress have insisted that any such "pay as you go" restrictions, which existed in the 1990s, should only apply to new spending, and not to new tax cuts.

Reinstating the rules would make it far more difficult for Congress to permanently extend Bush's tax cuts of 2001 and 2003.

House and Senate lawmakers hope to unveil a budget resolution as early as next week, and many Republicans want to include provisions that would allow the Senate to approve tax cuts this year with a simple majority of 51 votes.

Without a budget resolution, Senate rules effectively require that such tax cuts be approved by a two-thirds majority.

None of Bush's big tax cuts are scheduled to expire this year, but the 2003 tax cuts on stock dividends and capital gains are to expire in 2008 and the other big tax cuts are to expire by the end of 2011.

Extending all of the expiring tax cuts would add about $1.8 trillion to the federal debt over the next 10 years, according to the nonpartisan Congressional Budget Office. That would come on top of a rapid increase in the federal debt from $3.4 trillion to $4.3 trillion as a result of soaring annual deficits since 2001.

Greenspan implied the need for much bigger cuts than Bush has suggested in entitlement programs such as Medicare and Social Security.

"I fear that we may have already committed more resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver," he said. "If promises need to be changed, those changes should be made sooner rather than later."

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