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Greenspan Says Current Budget Policy `Unsustainable'

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Greenspan Says Current Budget Policy `Unsustainable' (Update5)


March 2 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan told Congress the record U.S. budget deficit is ``unsustainable'' and that spending cuts are needed before costs balloon for Social Security and other benefit programs.

The U.S. may have made promises it can't keep to baby-boomers who are getting ready to retire starting in 2008 and any changes to government programs should be made ``sooner rather than later,'' Greenspan told the House Budget Committee.

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

Greenspan used his third trip to Capitol Hill in less than three weeks to reiterate his support for creating private investment accounts in Social Security, a keystone of President George W. Bush's plan to rework the retirement system, even as polls show waning public support. He also urged Congress to restore restraints on budget spending, after a record $412 billion budget deficit in fiscal 2004.

Senate Majority Leader Bill Frist, a Tennessee Republican, said yesterday he can't promise a Social Security bill will be brought to a vote this year and urged supporters to do a better job of explaining it to the public.

Greenspan is saying ``that there needs to be some very substantial restraints on the use of fiscal resources unless we're willing to get ourselves in a real mess years from now,'' said Lyle Gramley, a former Fed governor and now adviser at the Stanford Washington Research Group in Washington, in an interview.

Economy `Reasonably Good'

The Fed chairman made only brief reference to the economy in the text of his remarks, telling committee members the expansion is proceeding at a ``reasonably good pace'' this year. He did not discuss monetary policy. Greenspan, who turns 79 on March 6, joined the Fed in 1987 and his term expires Jan. 31, 2006.

The benchmark 4 percent 10-year note maturing in February 2015 fell 3/32 at 11:57 a.m. in New York, pushing the yield up 1 basis point to 4.37 percent. Against the euro, the dollar traded at $1.3122 in New York from $1.3098 before his testimony was released at 10 a.m. The dollar was at 104.76 yen from 104.39.

The Fed has raised its benchmark overnight bank-lending rate six times since June, to 2.5 percent, in an effort to head off faster inflation.

Focus on Spending

Congress should focus on reducing spending, Greenspan said. ``The government's own imbalances will require scrutiny of both spending and taxes,'' he said. ``However, tax increases of sufficient dimension to deal with our looming fiscal problems, arguably pose significant risk to economy growth and the revenue base.''

At the same time, Greenspan called for Congress to offset any spending increases or tax cuts by reducing spending elsewhere in the budget, a so-called pay-go rule. Reinstating such a rule, which had been allowed to lapse in 2002, ``would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process,'' he said.

In response to a question, Greenspan said that ``containing budget expansion is the over-riding principle'' in his view. ``That we have some form of pay-go system, which is agreed upon by the Congress, is the over-riding consideration,'' he said.

Regarding programs such as Social Security and Medicare, Greenspan said he's concerned ``that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver.''

``If existing promises need to be changed, those changes should be made sooner rather than later,'' Greenspan said.

Social Security and Medicare

Greenspan also reiterated his support for private accounts within Social Security, calling a ``a more credible means of ensuring that the program actually adds to overall savings.''

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

``The pressures on the budget from this dramatic demographic change will be exacerbated by those stemming from the anticipated steep upward trend in spending for Medicare beneficiaries,'' he said. ``So long as health-care 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 that seems increasingly likely to make current fiscal policy unsustainable.''

Bush Plan

Bush last month sent Congress a $2.57 trillion budget that would cut spending on agriculture, housing and other domestic programs while allowing defense spending to grow. The budget projects a deficit of $390 billion in the fiscal year beginning Oct. 1, and the Congressional Budget Office has estimated that the transition to the president's personal accounts may cost as much as $2 trillion more.

A Gallup Organization poll for USA Today and Cable News Network conducted late last week showed Bush's approval rating on his handling of Social Security fell to 35 percent from 43 percent earlier in February.

Congressional Democrats yesterday said they found little support among voters for the private accounts at town hall meetings last week. ``Social Security privatization is not selling well in the heartland,'' Representative Chet Edwards, a Texas Democrat who represents Bush's hometown of Crawford, told reporters in Washington.

Greenspan stressed in his text the need for Congress to move quickly, or ``the consequences to the U.S. economy of doing nothing could be severe.''

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