Associated Press
Greenspan: Budget Deficits Pose Threat (!)
Thursday April 21, 10:54 am ET
By Jeannine Aversa, AP Economics Writer
Greenspan Warns Bloated Budget Deficits Pose Threat to the Nation's Long-Term Economic Health
WASHINGTON (AP) -- Bloated budget deficits pose a danger to the nation's long-term economic health, Federal Reserve Chairman Alan Greenspan warned anew Thursday. He issued a fresh call to policy-makers to move swiftly to get the government's fiscal house in order.
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Greenspan, in prepared testimony to the Senate Budget Committee, only very briefly touched on the economy's current performance, saying "activity appears to be expanding at a reasonably good pace," an assessment he has made repeatedly so far this year.
His comments come as some private economists are concerned about the extent to which high energy prices will crimp economic activity.
On the fiscal front, Greenspan said the persistence of swollen budget deficits in the years ahead "would cause the economy to stagnate or worse" unless the situation is reversed.
The budget deficit is a problem because it is projected to rise significantly as the first of 78 million baby boomers start to retire in 2008.
Last year, the government produced a budget deficit of $412 billion, a record in dollar terms. The deficit for this year is projected to shatter that record, coming in at an estimated $427 billion.
Persistently large budget deficits threaten the economy because they would push up interest rates for consumers and businesses. Higher borrowing costs would weigh on consumers' and businesses' willingness to spend and invest -- two important forces that keep the economy going. Rising interest rates also would slow growth in the housing market, Greenspan said.
And, growing budget shortfalls would force the government to borrow more to finance those deficits.
"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 said.
Greenspan again supported a return to pay-as-you-go budgeting policies that would require Congress to offset future increases in government spending or new tax cuts with reductions in other government programs or tax increases.
The Bush administration supports bringing back the pay-as-you-go provision for spending, but not for tax cuts. A decade-long pay-as-you-go provision expired in 2002.
The administration also has a goal of cutting the deficit in half by 2009.
"Our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken," Greenspan said.
Democrats mostly blame the growing budget deficits on President Bush's big tax cuts, which they contend mainly benefited the wealthy. Republicans credited the tax cuts with helping the economy rebound from the 2001 recession. The costs of the tax cuts along with paying for wars in Afghanistan and Iraq and fighting terrorism at home have led to the deficits, they say.
While Greenspan has endorsed Bush's move to let workers set up personal investment accounts as part of an overhaul of Social Security, he has called for a go-slow approach to setting up such accounts. His concern is that massive government borrowing to bring them about could push up interest rates.
Greenspan also has suggested that benefit cuts would be required to deal with looming funding problems within Social Security.
"I fear that we may have already committed more physical resources to the baby boom generation in its retirement years than our economy has the capacity to deliver," Greenspan said.
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