Greenspan Urges Cuts in Spending

The U.S. economy is growing at a “reasonably good pace,� Federal Reserve Chairman Alan Greenspan said Wednesday, but he warned that dangerous budget deficits must be fixed, preferably through spending cuts.

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

“Addressing the government’s own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base,� he said.

Although higher taxes boost government revenues, they also deplete consumer coffers, damping economic growth and spending -- strains the economy can ill afford as the baby boom generation retires and the proportion of workers shrinks, he said.

Greenspan has long favored spending cuts over tax increases.

The Fed chief said America’s aging population and soaring healthcare costs pose the biggest budget risk. “So long as healthcare costs continue to grow faster than the economy as a whole, the additional resources needed for such programs will exert pressure on the federal budget,� Greenspan said.

He again threw his weight behind the notion of restructuring the Social Security retirement system to include private investment accounts -- an idea President Bush is pushing in speeches around the country. Still, Greenspan said the fact that such a plan could lead to government involvement in financial markets gave him “certain pause.�

According to Bush’s fiscal 2006 budget proposal, the deficit would swell to a record $427 billion but shrink over the next five years to $207 billion in 2010.

But the figures exclude funding for Iraq and Afghanistan, the cost of making Bush’s tax cuts permanent and trillions of dollars in borrowing that would be needed to fund a transition to private Social Security accounts.