The Reagan administration's forecasts for next year's economic growth may be too optimistic, Federal Reserve Board Chairman Paul A. Volcker said yesterday. But he supported the "thrust" of the administration's plans for tax and spending cuts, and told the House Ways and Means Committee that the inflation forecast was "not unreasonable."
Volcker also called for even deeper spending cuts than already proposed, arguing that all the risks lay on the side of cutting too little rather than too much. He stressed the need to link tax cuts wilth spending cuts, and told the tax-writing panel that the more spending was cut, the greater the room for tax cuts. "To me, the linchpin of the whole ecnomic program is . . . massive progress" on spending cuts, Volcker said.
"The amount of tax reduction that can be prudently undertaken is dependent on cutting back the inexorable rise in federal spending," he told the committee. He refused to be drawn into much discussion of the detail of tax cuts, saying that there were "pluses and minuses" in a three-year tax cut such as the president has proposed.
But he did single out the ending of the so-called marriage penalty, where-by two-earner families can pay more tax if married than if single, as a low-priority tax cut. "No one argues that it has a particular effect on incentives," he said. Tax cuts should be aimed primarily at raising incentives to work, save and invest.
The present tax system is biased against savings and toward consumption and this should be reviewed urgently, Volcker said. But tax deductions for interest on housing loans, the major bias towards borrowing rather than saving, are politically sacrosanct.
Administration officials recently ruled out cuts in tax expenditures, or deductions and credits which lower tax liabilities. Volcker yesterday said he saw no reason in principle why Congress should not reduce some of these "espenditures" if it judged that they were not useful.
Balancing the budget through cutting public spending is essential in the fight against inflation, Volcker said. He pointed out that some of the cuts promised by the administration have not yet been outlined, and said he views, them as a sort of "progress payment" towards "what needs to be done to bring the budget into balance in reasonably prosperous economic conditions." But the budget cannot be balanced next year just by holding off from a tax cut, Volcker told the committee.
No economic model can explain recent economic developments adequately, but nevertheless there are good economic reasons for believing that the administration's proposals tackle the problems correctly, he said.