NCPA - National Center for Policy Analysis

BUDGET DEFICITS ARE UNSUSTAINABLE, SAYS FED CHIEF

March 3, 2005

The nation faces a future of economic stagnation, rising interest rates and budgetary crisis unless Congress takes major steps to cut deficit spending, Federal Reserve Chairman Alan Greenspan warned yesterday.

In his most stark assessment of the consequences of "unsustainable" budget deficits that hit $412 billion last year, the Fed chairman told the House Budget Committee that Congress will not be able to "grow out of the deficit" and that the only solution is to cut spending, curb Social Security and Medicare benefits and possibly even raise taxes a little or allow some tax cuts to expire.

According to Greenspan:

  • Congress should consider raising the retirement age, among other possibilities, to ease the funding crunch, because advances in medicine have enabled people to live for decades in good health beyond age 65.
  • With deficits equal to 3.5 percent of the economy's yearly output, both spending and taxes must be scrutinized to regain control over the budget, although he prefers spending cuts; moreover, large tax increases that could hurt economic growth should be avoided, but small ones would do little harm.
  • Although President Bush's $2.3 trillion tax cuts helped the economy when it was emerging from the 2001 recession, some of them might have outlived their usefulness and should be reviewed and subject to offsetting spending cuts or tax increases.
  • A first order of business for Congress should be to reinstate the pay-as-you-go rules and discretionary spending caps that prevented Congress during the 1990s from approving large new spending increases or tax cuts without offsets elsewhere in the budget, he said.

The consequences for the U.S. economy of doing nothing could be severe, says Greenspan. But the benefits of taking sound, timely action could extend many decades into the future.

Source: Patrice Hill, "Deficit spending seen as path to budget crisis," Washington Times, March 3, 2005.

 

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