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Greenspan Renews Warning on Budget Deficits

By Nell Henderson
Washington Post Staff Writer
Thursday, April 21, 2005; 3:06 PM

Federal Reserve Chairman Alan Greenspan said today that his support for tax cuts in early 2001 unintentionally encouraged policies that helped swing the federal budget from surplus to record deficits. In addition, he said for the first time explicitly that he expected tax increases to be part of any bipartisan agreement on deficit reduction.

But Greenspan, responding to questions during a Senate Budget Committee hearing today, said it was unfair for critics to ignore the warnings in his January 2001 congressional testimony that the surplus forecasts might be wrong, and his recommendation of some "trigger" mechanism that would limit tax cuts if certain budget targets were not met.

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Testimony of Chairman Alan Greenspan Before the Senate Budget Committee (Apr 21, 2005)

"I think its frankly unfair" for critics to blame him for the fact that Congress chose to "read half my testimony and discard the rest," Greenspan said, venting his frustration on the issue publicly for the first time, in response to a question from Sen. Paul Sarbanes (D-Md.).

Sarbanes chided the Fed chief that he is well aware of how Congress works, and he should have known lawmakers might not heed all his cautions.

Sarbanes said he believed it was "fair" for lawmakers to see Greenspan's 2001 remarks "as a green light to the tax cuts," which were enacted without any triggers.

"I plead guilty to that," Greenspan said. "I did not intend it that way."

Greenspan reminded Sarbanes that both parties were proposing tax cuts at the time, when government economists forecast budget surpluses "as far as the eye can see." In May 2001, Congress passed a reduced form of President Bush's proposal, a tax cut worth $1.35 trillion over 10 years.

The exchange between the two men came at a hearing today on how to rein in the budget deficit, which reached $412 billion last year and is projected to expand dramatically in coming decades, particularly if changes are not made to the Social Security and Medicare programs.

"The federal budget deficit 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 in his prepared testimony. "But most important, deficits as a percentage of [gross domestic product] in these simulations rise without limit. Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse."

Greenspan called for "major deficit-reducing actions" and acknowledged that tax increases may be part of an agreement between the two parties.

Republican congressional leaders have ruled out tax increases to shrink the deficit. On the contrary, they are pushing to extend expiring tax cut provisions and to pass new tax breaks for energy companies.

"I don't doubt, at the end of the day," that tax increases will be part of any final deficit reduction solution, Greenspan said, although he was quick to add that he believes raising taxes also restrains economic growth. There is "no way you can raise tax rates enough" to cover future spending commitments, he said.

Greenspan has always said that he would prefer the deficit be shrunk as much as possible through spending cuts before tax increases are contemplated. He believes holding taxes as low as possible frees resources to be used more productively by the private sector, fueling investment and raising the nation's standard of living over time.

And even after budget deficits reappeared, Greenspan has endorsed extending Bush's expiring tax cuts. But he has always done so while urging Congress to restore budget rules that would require the lost tax revenue be offset by similarly sized spending reductions, so there is no net growth in the deficit.

Congressional Democrats have supported restoring those so-called Pay-Go rules, which would make it near impossible politically to extend the tax cuts. The White House and congressional Republicans support applying the rules to spending increases and not tax cuts, for the same reason.

Greenspan today again supported applying the Pay-Go rules to both taxes and spending, saying, "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."

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