- WASHINGTON (Reuters) - Federal
Reserve Chairman Alan Greenspan warned on Thursday that unless lawmakers
come to grips with spiraling U.S. deficits, the economy was at risk of
stagnation "or worse."
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- "Under existing tax rates and reasonable assumptions
about other spending ... projections make clear that the federal budget
is on an unsustainable path, in which large deficits result in rising interest
rates and ever-growing interest payments that augment deficits in future
years," Greenspan told the Senate Budget Committee.
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- He said that while the U.S. economy was "doing well,"
the danger was that deficits would keep rising as a percentage of total
national output.
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- "Unless that trend is reversed, at some point these
deficits would cause the economy to stagnate or worse."
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- The early questioning from lawmakers focused narrowly
on budget issues, rather than on the economic outlook or oil prices. Bond
and stock markets showed little early reaction to Greenspan's remarks.
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- Much of the Fed chairman's testimony echoed prior cautions
he has made to Capitol Hill lawmakers. He stressed that steps to fix the
problem were essential.
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- "As the latest projections from the (Bush) administration
and the Congressional Budget Office suggest, our budget position is unlikely
to improve substantially in the coming years unless major deficit-reducing
actions are taken," the Fed chief said.
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- GET CONTROL
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- Greenspan reiterated his call for some type of automatic
government spending controls.
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- "In my judgment, the necessary choices will be especially
difficult to implement without the restoration of a set of procedural restraints
on the budget-making process," he said.
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- Bush has pledged to cut the budget gap in half by 2009.
The Congressional Budget Office has estimated the 2005 budget shortfall
will come in around $400 billion, including funding for military operations
in Iraq and Afghanistan.
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- The Fed chief has long urged renewal of so-called pay-go
provisions that compel lawmakers to show how they will fund any spending
initiatives or tax cuts.
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- Greenspan said the approaching surge of American retirees
added urgency to the need to deal with budget constraints in light of uncertainty
about the scale of looming medical and retirement costs.
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- "These uncertainties -- especially our inability
to identify the upper bound of future demands for medical care -- counsel
significant prudence in policy-making," Greenspan said, adding that
policy-makers "need to err on the side of prudence when considering
new budget initiatives."
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- Greenspan said the U.S. economy was growing at a reasonably
good pace but noted "the positive short-term economic outlook is playing
out against a backdrop of concern about the prospects for the federal budget."
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- Ronald Simpson, a managing director of Action Economics
LLC in New York, said it seemed like a less-enthusiastic take on the economic
outlook than that in the statement issued after the policy-setting Federal
Open Market Committee met on March 22, when it said national output was
growing solidly.
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- "(It) sounds like a bit of a downgrade from the
last FOMC statement which sounded a little more upbeat," Simpson said.
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- Greenspan repeated that the United States may already
be in a position where it cannot meet commitments made to the baby boom
generation and urged benefit cuts, if needed, be made as soon as possible.
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- "If existing promises need to be changed, those
changes should be made sooner rather than later," he said.
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