Global Policy Forum

By Edmund L. Andrews

Alan Greenspan, chairman of the Federal Reserve, warned on Wednesday that the federal budget deficits were "unsustainable," and he urged Congress to scrutinize both spending and taxes to solve the problem. Mr. Greenspan also warned that the deficits could be driven sharply higher by costs connected to the aging of the baby boom generation, particularly entitlement programs like Social Security and Medicare. While reiterating his support for President Bush's plan to offer private accounts as part of overhauling Social Security, Mr. Greenspan urged lawmakers to tackle the program's problems now, rather than later.

The assessment was Mr. Greenspan's gloomiest to date about the government's budget straits. Unless Congress takes major action to reduce the deficits, preferably, he said, by deep cuts in spending, annual budgetary shortfalls will continue and closing those gaps will become even more difficult.

Though Mr. Greenspan has made similar pleas in the past, he spoke more urgently on Wednesday and disagreed more adamantly with Republican lawmakers and Mr. Bush, who have steadfastly refused to put restrictions on new tax cuts. "Addressing the government's own imbalances will require scrutiny of both spending and taxes," Mr. Greenspan told members of the House Budget Committee. "However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base."

The Fed chairman emphasized that his own preference was to reduce deficits by cutting spending rather than raising taxes. But he said the "overriding principle" was to reduce the deficit, making compromise essential. "It's the principle that I think is involved here, namely that you cannot continuously introduce legislation which tends to expand the budget deficit," Mr. Greenspan said.

The Fed chairman's tone, as he addressed the House Budget Committee on Wednesday, was noticeably more urgent than it was last year or even in Congressional hearings just a few weeks ago. "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," he told lawmakers. "Unless we do something to ameliorate it in a very significant manner," he added, "we will be in a state of stagnation."

White House officials played down Mr. Greenspan's remarks, noting that he had placed top priority on reduced government spending and that Mr. Bush had vowed to reduce the budget deficit by half by 2009. "The president does have a substantial deficit-reduction package," said Trent Duffy, a White House spokesman. "His budget is a continuation of that policy, and he looks forward to working with Congress in cutting that spending down. Likewise, the president agrees that the long-term budget is the issue, which is why he's trying to lead a national discussion and reform movement to save and strengthen Social Security."

Mr. Greenspan's comments deepened a long-running disagreement between the Federal Reserve and the White House, and they come at a moment when House and Senate leaders are trying to hammer out a budget resolution or blueprint for tax and spending bills this year. Mr. Greenspan, a Republican, has long argued that Congress should reinstate rules that would require lawmakers to offset the cost of tax cuts and new spending programs with savings in other areas.

Mr. Bush and his Republican allies in Congress have insisted that any such "pay as you go" restrictions, which existed in the 1990's, apply only to new spending and not to new tax cuts. Reinstating the previous budget rules would make it far more difficult, if not almost impossible, for Congress to extend permanently Mr. Bush's tax cuts of 2001 and 2003. Extending all of the expiring tax cuts add about $1.8 trillion to the federal debt over 10 years, according to the Congressional Budget Office. That would come on top of a rapid escalation in the federal debt from $3.4 trillion to $4.3 trillion as a result of soaring annual deficits since 2001.

House and Senate lawmakers are hoping to unveil a budget resolution as early as next week, and many Republicans want to include provisions that would allow the Senate to approve tax cuts this year with a simple majority of 51 votes. Without a budget resolution, Senate rules effectively require that such tax cuts be approved by a two-thirds majority.

None of Mr. Bush's big tax cuts are scheduled to expire this year, but the 2003 tax cuts on stock dividends and capital gains are to expire in 2008, and the other big tax cuts are all to expire by the end of 2011. Making all of those tax cuts permanent, as Mr. Bush wants, would add about $1.8 trillion to the federal debt over 10 years, the nonpartisan Congressional Budget Office says.

In addition to calling for a return to the tough budget rules of the 1990's, the last of which expired in 2002, Mr. Greenspan urged Congress to adopt a mechanism that would allow for a "midcourse correction" in the event that budget deficits turn out to be sharply higher than expected. That is another idea that the White House and Republican legislators have previously rejected, and it is one that is unlikely to be embraced this year.

Representative Jim Nussle, Republican of Iowa and chairman of the House Budget Committee, immediately took issue with Mr. Greenspan on the need for restrictions on future tax cuts. "I would hate to see an arbitrary rule," Mr. Nussle said, noting that Democrats had bitterly opposed Mr. Bush's proposal to reduce taxes on dividends and capital gains - a tax cut that Mr. Greenspan endorsed in 2003 and said on Wednesday should be made permanent.

But Mr. Greenspan stood firm, contending that the "overriding" principle was to reduce the deficit and that Congress should find ways to pay for the cost of making the tax cuts permanent. "Differing people hold differing views, and compromise is essential in getting a functioning legislature to work its will," Mr. Greenspan said.

In his testimony on Wednesday, Mr. Greenspan repeated his strong support for a crucial element of Mr. Bush's plan to replace part of Social Security with a system of private savings accounts. Indeed, Mr. Greenspan implied the need for much bigger cuts than Mr. Bush has suggested in the government's full array of old-age entitlement programs, including Medicare as well as Social Security. "I fear that we may have already committed more fiscal resources to the baby boom generation in its retirement years than our economy has the capacity to deliver," he told lawmakers. "If existing promises need to be changed, those changes should be made sooner rather than later."

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