Federal Reserve Chairman Alan Greenspan on Thursday lent support to a White House bid to make $1.7 trillion in tax cuts permanent, telling Congress spending control was the best way to cut the budget gap.
"I am in favor ... of continuing the tax cuts that are in dispute at this particular stage," the influential central bank chief told the Senate Banking Committee, wading into a contentious election-year debate.
"I would argue strenuously that it should be taken out on the expenditure side."
Greenspan echoed White House arguments that tax hikes could hit the economy, saying: "It is crucially important that we try to find, wherever we can, reductions in outlays before adverting to the question of revenues to fill in the gap."
In the formal part of his testimony, which he delivered first on Wednesday before a House of Representatives panel and repeated on Thursday, Greenspan warned of both short- and long-term dangers posed by record budget deficits.
Since taking office, President Bush has won tax cuts totaling some $1.7 trillion over 10 years. But some of the reductions expire at the end of this year and all run their course by the end of the decade.
Pressing for permanence
In the budget plan he sent to Congress this month, Bush called for making those tax cuts permanent, a stand that faces considerable opposition from Democrats who say the reductions have helped primarily the wealthy.
Shortly after Bush took office in early 2001, at a time when large and growing budget surpluses were forecast, Greenspan told Congress taxes should be cut.
Many analysts believe Greenspan's support for tax reductions three years ago helped the White House win a package totaling $1.35 trillion that year. Many Democrats are still bitter over the Fed chairman's stance.
Since then U.S. fiscal fortunes have soured. The White House has forecast a budget deficit of $521 billion this year, a record in dollar terms, although not when measured as a proportion of the size of the economy.
Greenspan, testifying for a second straight day on the Fed's semiannual monetary policy report, twinned his tax-cut support with a fresh call on lawmakers to reinstate caps on much government spending and so-called pay-go rules requiring tax or spending plans be paid for elsewhere in the budget.
"One of the first orders of business of Congress would be to restore discretionary caps, and especially pay-go," he said, noting that if such rules were in place spending cuts would need to be found to make up for any revenues lost from extending tax cuts.
As before the House panel on Wednesday, Greenspan said controlling spending was especially crucial given the fiscal crunch the country will face when the Baby Boom generation begins to retire and draw benefits from the Social Security retirement program.
"I think the sooner we address that, the sooner we can assure the people who will be retiring that the benefits that are promised will indeed be forthcoming," he said.
Absent a fix, Social Security will begin to pay out more than it collects in taxes by 2018, exhausting its trust fund by 2042. The Medicare program faces similar pressure. Its hospital trust fund is projected to run out by 2026.
In his opening remarks, Greenspan repeated the Fed's belief that the U.S. economy had turned the corner to vigorous growth and reiterated that the central bank could be patient in deciding when to rate interest rates from 1958 lows, in part because the jobs market had been so weak.
Greenspan said during questioning that the combination of rapid U.S. economic growth with few new jobs was unusual.
"I don't recall a period even remotely like this," he said. "What we are seeing is something new, it's something different."
However, Greenspan expressed confidence employment would pick up soon, saying businesses could not forever ramp up output without hiring.
As on Wednesday, the Fed chief faced a number of questions from lawmakers concerned about U.S. firms "outsourcing" jobs to foreign countries. He strongly urged lawmakers not to turn their backs on open trade.