Federal Reserve Chairman Alan Greenspan yesterday endorsed the idea of a major federal tax cut as not only fiscally prudent but also necessary.

Citing the huge increases projected in federal budget surpluses, Greenspan told the Senate Budget Committee that his earlier cautions against cutting taxes are no longer valid. The looming surpluses have "reshaped the choices and opportunities before us," he said, noting that the federal debt could be paid before the end of the decade and there would still be money left over, barring a major and prolonged recession.

If the surpluses don't end when the debt does, there could be a serious economic disruption, Greenspan said. That makes large tax cuts essential, he indicated.

Greenspan declined to endorse President Bush's plan for a $1.6 trillion tax cut over 10 years, but he undercut objections to it by Democrats who have been arguing that budget surpluses won't be enough to cover both added spending sought by members of both political parties and such a large tax cut.

Greenspan's testimony didn't please some committee members. "It wouldn't be far off the mark for the press to carry the story 'Greenspan Takes Lid Off of Punch Bowl,' because your position in the past has consistently been that the surpluses should be devoted to reducing the debt," said Sen. Paul A. Sarbanes (D-Md.).

Greenspan also told the committee that U.S. economic growth is "probably close to zero at the moment" because of a sharp decline in manufacturing.

His remarks about the economic slowdown were hints that he will urge Fed policymakers next week to cut the Fed's target for overnight interest rates by half a percentage point. The Fed unexpectedly cut rates by a half-point on Jan. 3 and financial analysts have been divided since over whether any further cut might be only a quarter-point.

"The crucial issue is whether that marked decline [in production] breaches consumer confidence. . . . To date, it has not," Greenspan said. Which way the economy will go "is going to be resolved one way or the other in three months or so," he said.

Even if the economy is as precariously balanced as he described -- many other analysts and some other Fed officials believe it is stronger than he indicated -- Greenspan discouraged the notion that taxes could be cut soon enough to affect the outcome one way or the other.

Bush said later at the White House: "I was pleased to hear Mr. Greenspan's words. I thought they were measured and just right. What Alan Greenspan was saying to the nation is that in order to make sure our economy grows, we've got to have good monetary policy and sound fiscal policy, a component of which is wise spending as well as tax relief."

Greenspan was not "supporting any particular plan," Bush said. "I know he wasn't going to the Hill to say, well, President Bush has got the right plan. I felt like he was speaking about policy in general."

Greenspan told the committee that he hasn't really changed his opinion of what should be done with the mounting budget surpluses. In testimony in recent years, he has questioned whether the large projected surpluses would materialize, and argued that if they did, they should be devoted to paying the government's debt. That would keep interest rates relatively low, encourage more business investment and increase the capacity of the U.S. economy to grow, he said.

"I haven't changed my view about paying down the debt," Greenspan said yesterday. "I think we should pay it down as quickly as we can."

But two developments convinced him that future surpluses are likely to be much larger than he had anticipated, Greenspan said. First, it appears more likely that the significant increase in the growth of labor productivity -- a measure of the economy's efficiency -- in recent years is permanent. If so, he said, the economy will be able to sustain higher economic growth in coming years, which will keep federal tax revenue increasing steadily. Second, as the Office of Management and Budget and the Congressional Budget Office incorporate assumptions about sustained higher growth in their budget projections, estimates of prospective surpluses over the next 10 years have soared.

Last January, the Congressional Budget Office projected a 10-year cumulative surplus of $3.15 trillion. In July it raised that to $4.56 trillion, and it is now expected to raise it yet again shortly, to more than $5.5 trillion.

The Clinton administration's Office of Management and Budget recently put the figure at $5 trillion for the fiscal years 2002 to 2011.

If the latest estimates are in the ballpark, it is possible that the government could be "caught at an inappropriate time getting down to zero debt at the time when the unified [budget] surplus is several hundred billion dollars, say $400 billion or $500 billion," Greenspan said. At that point, the government would either have to start buying large amounts of private assets, such as corporate stocks and bonds, or enact a huge tax cut.

"If we don't wish to accumulate assets, we have to incur a very massive stimulation into the economy [from such a tax cut], which is bad policy," Greenspan said. Buying private assets -- or increasing federal spending significantly -- would also be bad, he said..

"I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures," he said.

A desirable alternative would be a tax cut that becomes progressively larger over the years, he said.

Asked whether Bush's proposal for a $1.6 trillion tax cut over the next 10 years is the sort of cut he has in mind and whether he supports the plan, Greenspan said it wouldn't be appropriate to comment because that is "fundamentally a political decision."

But, he said, he has always favored reduced marginal income tax rates -- an important part of Bush's plan -- because they would "maximize" economic efficiency and allocation of resources.

Many Democrats advocate a smaller tax cut than Bush's, with very different features, partly because the reductions in the tax rate on each income bracket that Bush wants would give most tax relief to upper-bracket taxpayers.

On the other hand, many Democrats support parts of the Bush plan, including eliminating the marriage penalty for two-earner families and greatly reducing or killing the federal estate tax.

Greenspan's turnabout on taxes, whatever its basis, may have the same effect on Bush's proposal as his support had in 1993 for President Clinton's deficit-reduction proposal, which included higher taxes on higher-income taxpayers. At that time, Greenspan surprised many Republicans by arguing that bringing down the deficits was so important economically that even higher taxes were justified. The Clinton plan passed with no Republican support.

Greenspan stressed in yesterday's testimony that Congress should approach cutting taxes cautiously. The sources of the flood of federal revenue that underlie the surplus projections are still not well understood and might change unexpectedly, he said. Not only should tax cuts be phased in over several years, he said, perhaps they also should be made conditional on the government receiving the money it expects.

"With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating" through a combination of excessively large spending increases and tax cuts, Greenspan said. "We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake."

Sen. Phil Gramm (R-Texas), left, and Sen. Christopher Bond (R-Mo.) listen to Federal Reserve Chairman Alan Greenspan's testimony yesterday.