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Greenspan Says He Expects Tax Increases

By Nell Henderson
Washington Post Staff Writer
Friday, April 22, 2005; Page E01

Federal Reserve Chairman Alan Greenspan said yesterday, for the first time explicitly, that he expects tax increases to be part of any eventual agreement to reduce the federal budget deficit.

Greenspan, appearing before the Senate Budget Committee, also acknowledged that his support for tax cuts in early 2001 unintentionally led to policies that helped swing the federal budget from surplus to deficits. In pointed comments, Greenspan addressed recent Democratic critics who have sought to blame him for the return to deficits.

Federal Reserve Chairman Alan Greenspan said lawmakers misinterpreted his testimony on the surplus in 2001. (Shaun Heasley -- Reuters)

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Greenspan reminded lawmakers that government economists at the time predicted budget surpluses "as far as the eye can see." Yet Greenspan had warned then in congressional testimony that the forecasts might be wrong, and he recommended some "trigger" mechanism that would limit the tax cuts if certain budget targets were not met.

Greenspan said he thinks "it's frankly unfair" for critics to blame him now for the fact that Congress chose to "read half [his] testimony and discard the rest."

Sen. Paul S. Sarbanes (D-Md.) said he believed it was "fair to consider how your message would be taken" and that lawmakers saw Greenspan's 2001 remarks as "providing a green light" for tax cuts, which were enacted without triggers.

"I plead guilty to that," Greenspan said. "If indeed that is the way it was interpreted, I missed it. In other words, I did not intend it that way."

The deficit hit a record $412 billion last year and is projected to expand dramatically as the huge baby boom generation starts retiring and collecting Social Security and Medicare benefits.

"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 yesterday.

The economy is "expanding at a reasonably good pace," Greenspan said, without commenting on the recent slowdown in spending and hiring or the outlook for inflation and interest rates.

But, he said, the economy's "positive" short-term prospects contrast with longer-run concerns that unrestrained growth in the budget deficit will eventually "cause the economy to stagnate or worse."

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