Federal Reserve Board chairman Paul A. Volcker warned Congress yesterday against enacting any major tax reductions this year or next -- including the new tax cuts President Carter proposed two weeks ago -- unless it pares spending, as well.
In testimony before the House Budet Committee, Volcker cautioned that any move to increase the budget deficit would quickly revive inflation fears in the markets, send interest rates skyrocketing and threaten any economic rebound.
If that happens, the Fed chairman told the lawmakers, "I wouldn't put a lot of money on the strength and sustainability of the recovery." He hinted the Fed might have to tighten money further if inflation got out of hand.
Volcker's spokesman opposition to Carter's new tax-cut proposals came in answer to a question about the president's new Aug. 29 program for reindustrializing the economy. Carter's plan calls for $27.6 billion in tax cuts in 1981.
But the Fed chairman said yesterday a tax cut that size is bigger than I would want to support at this time." He also opposed a Carter plan to give taxpayers a credit on income taxes to offset rising Social Security taxes.
Volcker's comments yesterday marked the first time he has publicly critisized the new Carter reindustrialization plan. In testimony after the program was unveiled, he was lukewarm about the package but did not oppose it.
The Fed chief was not asked about the Ronald Reagan's new tax-cut plan during the two-hour hearing and declined after the session to answer questions about it from reporters. Reagan proposed big tax cuts and spending cuts as well.
However, Volcker's unmistakeable message to the lawmakers was that Congress should shelve all talk of tax cuts, even to the point of not providing for one in its new congressional budget resolution.
"I don't see the evidence for justifying sweeping tax relief right now," the Fed chairman told the panel. Asked whether even small "targeted" tax cuts should be eschewed, Volcker said; "That is my preference quite clearly."
The Fed chairman also made these points:
He said the Fed will not ease its plans for a continued gradual reduction of the growth of the nation's money supply, despite fears by some liberals that it may be choking off the recovery.
If the central bank loosened its reins, he argued, it would only revive inflation fears, push interest rates up and drive the dollar back down. "We cannot escape that problem by simply increasing the money supply," he said.
He suggested the governemnt try again to negotiate a "social contract" with business and labor to help hold wages and prices down -- including consideration of a plan to use tax breaks as a reward for wage restraint.
He said he was "frankly concerned about" the size of spending increases projected in the latest budget estimate, even though the bulk of the rise stemmed mainly from deteriorating economic conditions.
The Fed chairman also voiced concern about the new buildup of inflation pressures, especially in soaring food prices.He dismissed recent improvements in consumer prices as "related largely to transitory factors."
Volcker's warning came a day after Senate Republicans served notice that they will push vigorously for enactment of a tax-cut bill before the election, even if it means trying to tack one onto a minor bill.
Sen. Robert Dole (R-Kan.) told reporters he will seek a commitment for an early vote on the tax bill approved by the Senate Finance Committee. If the Democrats balk, he said, he will try to add it onto other legislation.
Meanwhile, House Budget Committee Chairman Robert N. Giaimo (D-Conn.) expressed fears yesterday that Congress may not come back for a post-election session this year, dashing any hopes for passing a revised budget.
Giaimo told reporters there is "pressure" on House and Senate leaders to avert a post-election session so as to avoid having to vote for a deficit.He said failure to finish the budget would undercut Congress' new budget process. s
In his testimony yesterday, Volcker also acknowledged that the performance of key economic indicators recently suggested that "the recession could be relatively short-lived."
However, he declined to predict flatly that a recovery was imminent. And he warned that the "real danger" lay in the possiblity of reviving inflationary psychology.