Greenspan says budget deficits may stagnate US economy

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April 22: Federal Reserve Chairman Alan Greenspan told Congress record deficits threaten the US economy, and urged lawmakers to cut spending and work toward a balanced budget.

“Our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken,” Greenspan, 79, said in testimony to the Senate Budget Committee.

The Bush administration projects the federal deficit will reach a record $427 billion dollars in the current fiscal year, which ends September 30. The most recent estimate from the Congressional Budget Office is for a deficit of $394 billion. The previous record was $412 billion in fiscal 2004.

“Under existing tax rates and reasonable assumption about other spending, these projections make clear that the federal budget is on an unsustainable path,” Greenspan said. “Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse,” he added.

Greenspan made only passing reference to the current economy in the text of his remarks, telling the committee that after a “solid performance” last year, economic “activity appears to be expanding at a reasonably good pace.” He did not address monetary policy. Fed policy makers raised the benchmark US interest rate to 2.75% on March 22. They next meet May 3.

Thursday’s comments are similar to testimony Greenspan gave to the House Budget Committee in March, when he told lawmakers that the current deficit is “unsustainable” and that spending cuts are needed before the retirement of the Baby Boom generation sends costs ballooning for Social Security and other entitlement programmes.

Greenspan’s focus, , since February, has “shifted away from monetary policy and analysis of the economy and where we are in the cycle toward these more longer-term structural, fiscal type problems,” said John Herrmann, director of economic commentary at Cantor Fitzgerald LP, in an interview.

Greenspan said demographic challenges “will require hard choices, and the future performance of the economy will depend on those choices.” He urged Congress to act quickly, because “crafting a budget strategy that meets the nation’s longer-run needs will become ever more difficult the more we delay”.

Fiscal 2004 outlays for Social Security, Medicare and Medicaid totaled about 8% of gross domestic product, Greenspan said. Government projections show those outlays will rise to 9.5% by 2015, and will be around 13% by 2030, when the number of people receiving old-age benefits will have roughly doubled.