Alan Greenspan, the Federal Reserve chairman, called on Wednesday for “major deficit-reducing actions” to improve the federal budget outlook.
In testimony before the House budget committee, he said that the fiscal deficit was “unlikely to improve significantly in the coming years” without decisive action by the administration and Congress. He repeated his call for action to improve the long-term budget outlook through reforming Social Security and Medicare.
In testimony billed as an outlook on the economy and fiscal issues, Mr Greenspan focused almost entirely on budget issues, saying only that the economy had delivered solid performance last year and continued to grow this year at a “reasonably good pace”.
The federal fiscal deficit reached 3½ per cent of gross domestic product last year. The budget faces long-term challenges as spending on the elderly rises with the retirement of the baby-boom generation, starting in 2008.
The Bush administration has forecast a steady reduction in the fiscal deficit over the next four years but it has left a number of big items including the war in Iraq, reforming the alternative minimum tax and Social Security reform out of its budget arithmetic.
The Fed chairman called on Congress to adopt budget rules to help rein in the deficit, including the discretionary spending caps and rules that changes in spending and taxation be revenue neutral, which applied during the 1990s. This would provide a better basis for facing future fiscal challenges associated with the ageing population, he said, adding that Congress should also adopt automatic stabilisers that would cut spending or raise taxes in the event of unanticipated budget shortfalls.
That would aid “mid-course” corrections to bring the budget back into balance when it veered off track, he said. “In my judgment, the necessary choices will be especially difficult to implement without the restoration of a set of procedural restraints on the budget making process”.
Mr Greenspan reiterated his preference for spending curbs rather than tax increases in restoring fiscal discipline, and also stressed that this was a personal preference rather than the view of the Federal Reserve.
He repeated his guarded support for the private savings accounts favoured by the White House as part of Social Security reform. This had a greater chance of increasing national savings to deal with an ageing population than the alternative of trying to increase savings through the Social Security trust fund, since Congress has shown a tendency to use the trust fund to pay for spending and tax cuts.
However, Mr Greenspan stressed that health programmes presented problems larger and more intractable than the pension system. He said: “So long as healthcare costs continue to grow faster than the economy as a whole, the additional resources needed for such [programmes] will exert pressure on the federal budget that seems increasingly likely to make current fiscal policy unsustainable.”
