Bush must prepare for new waron deficit

March 6, 2005 by John Allen · Leave a Comment

Greenspan Attacks Deficits in Gloomy Warning

In his gloomiest assessment yet about the government’s budget outlook, Alan Greenspan warned that annual shortfalls were “unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken.” The Fed chairman emphasized that his strong preference was to reduce the deficit through spending cuts rather than tax increases.

But he bluntly disagreed with Republican lawmakers and President George W. Bush by insisting that Congress offset the cost of making Bush’s tax cuts permanent.

“Addressing the government’s own imbalances will require scrutiny of both spending and taxes,” Greenspan told members of the House Budget Committee.

Though the Fed chairman has made similar pleas in the past, he spoke more urgently on Wednesday and disagreed more adamantly with Bush and Republican lawmakers, who have steadfastly refused to put restrictions on new tax cuts.

“When you begin to do the arithmetic of what the rising debt level implied by the deficits tells you, and you add interest costs to that ever-rising debt, at ever-higher interest rates, the system becomes fiscally destabilizing,” Greenspan said.

“Unless we do something to ameliorate it in a very significant manner, we will be in a state of stagnation.” Greenspan’s comments came as House and Senate leaders were trying to craft a budget resolution, a blueprint for spending and tax legislation this year, that they hope to present as early as next week.

One major issue in those discussions is whether to include provisions that would make it easier to extend some of Bush’s tax cuts, one of the White House’s top priorities.

None of Bush’s big tax cuts are scheduled to expire this year, but the 2003 cuts on stock dividends and capital gains are set to expire in 2008 and the other big tax cuts are all set to expire by the end of 2011.

Making all of those tax cuts permanent, as Bush wants, would add about $1.8 trillion to the federal debt over the next 10 years, according to the nonpartisan Congressional Budget Office.

Representative Jim Nussle, Republican of Iowa and chairman of the House Budget Committee, immediately took issue with Greenspan on the need for restrictions on future tax cuts.

“I would hate to see an arbitrary rule,” Nussle said, adding that Democrats had bitterly opposed Bush’s proposal to reduce taxes on dividends and capital gains, a tax cut that Greenspan endorsed in 2003 and said on Wednesday should be made permanent.

But Greenspan contended that the “overriding” principle was to reduce the deficit and said that lawmakers had to be ready to compromise.

“It’s the principle that I think is involved here, namely that you cannot continuously introduce legislation which tends to expand the budget deficit,” the Fed chairman said, adding that “compromise is essential” and that this is an issue of “political economy.”

As he has in the past, the Fed chairman focused most of his attention on the long-term fiscal problems that will begin as the baby boom generation begins to reach retirement age in 2008.

He strongly supported Bush’s plan to let people divert some of their Social Security taxes into private accounts, but he called for much bigger cuts than Bush has suggested in the government’s full array of old-age entitlement programs Medicare as well as Social Security.