Greenspan warns of deficit's threats

WASHINGTON -- On the same day that Federal Reserve chairman Alan Greenspan issued a fresh warning about the dangers of a bloated budget deficit, Congress considered new tax breaks for the energy industry and an $81 billion measure to pay for U.S. military operations in Iraq and Afghanistan.

The events Thursday illustrated the challenges -- "hard choices," as Greenspan put it -- that policy-makers face in trying to control spending.

Greenspan, who steadily has pressed lawmakers, told the Senate Budget Committee that unless the situation is reversed, the economy could "stagnate or worse."

Greenspan's plea for fiscal fitness coincides with the deterioration of government balance sheets. Even with plans to control the deficit by limiting spending, President Bush and Congress project deficits over the next five years to exceed $200 billion annually.

The shortfalls are expected to increase as baby boomers soon begin to retire.

"The harsh reality here is that our fiscal condition is not improving," said Sen. Kent Conrad of North Dakota, the top Democrat on the Senate Budget Committee.

"I think part of the frustration of many of us on this committee is convincing our colleagues that there really is a problem," he said. "And they're probably not going to be convinced unless the American people are convinced. And it's very hard to convince people there is a real threat to our collective economic security when the economy seems to be doing reasonably well."

In the long run, persistently large budget deficits threaten the economy because they can push up interest rates for consumers and businesses. Higher borrowing costs would effect the willingness of consumers and businesses to spend and invest.

Greenspan told senators that "the federal budget is on an unsustainable path," in which large deficits will lead to higher interest rates.

Sen. Pete Domenici, R-N.M., said Congress "overpromised" in its Social Security and health care commitments.

But he questioned Congress' political will to tackle the problem.

"I have been asking the question in my own mind. 'Will we be able to solve the problem' -- that is make the policy decisions in a timely manner -- or will we in America await a failure -- a major failure in the health delivery system before we do anything?"

Greenspan repeated his support for a return to budgeting policies that would require Congress to offset future increases in government spending or new tax cuts with reductions in other government programs or tax increases.

A decade-long pay-as-you-go provision expired in 2002.

"Our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken," Greenspan said.

Greenspan touched a nerve with Democrats, some of whom are still stinging from the Fed chairman's endorsement of Bush's $1.3 trillion tax cut in 2001. That cut was proposed when the government was expecting a decade of budget surpluses.

"I was wrong like everybody else on the issue of surpluses," Greenspan said.

In 2001, Greenspan said the tax cut should be accompanied by a mechanism that would rescind the tax cut if economic forecasts changed. He said it was "frankly unfair" for people not to remember that point.

"I think it is fair to consider how your message would be taken," said Democratic Sen. Paul Sarbanes of Maryland, recalling the 2001 tax cut endorsement. "It clearly was taken in the way that I have suggested in giving the green light."

Democrats mostly blame the growing budget deficits on Bush's tax cuts, which the lawmakers contend mainly benefited the wealthy.

Republicans credited the cuts with helping the economy rebound from the 2001 recession. The costs of the cuts, along with paying for wars in Afghanistan and Iraq and fighting terrorism at home, have led to the deficits, Republicans say.

The committee chairman, Sen. Judd Gregg, R-N.H., said the cuts were "good policy" as evidenced by the "economic recovery ... and the shallowness of the recession. ... But that's history. We're trying to look forward here."