Greenspan backs Bush tax cuts

Federal Reserve Chairman Alan Greenspan yesterday said he supports renewing President Bush’s tax cuts, but only if they are offset by spending cuts estimated at $1 trillion.

To ensure the tax cuts are paid for, Mr. Greenspan said Congress’ first priority should be to reinstate budget rules that expired in 2002 that require any new or extended tax cuts and spending programs to be offset by cuts elsewhere in the budget.

With an eye toward balancing the budget to avert a financial disaster after baby boomers start retiring in six years, Congress should consider cuts in all spending programs — including the politically sensitive entitlements Social Security and Medicare, he said.

“I am in favor, as I have indicated in the past, for continuing the tax cuts that are in dispute at this particular stage. But I would argue strenuously that it should be taken out on the expenditure side,” he said.

Spending cuts proposed by President Bush are aimed primarily at some $360 billion of domestic discretionary spending programs such as transportation and agriculture — leaving out the largest and fastest-growing programs, Mr. Greenspan said.

Congressional Republicans want to freeze those discretionary programs at this year’s levels, yielding about $2 billion more in savings than Mr. Bush has proposed. Any cuts would be difficult to pass in an election year, when spending usually goes up.

But with the deficit increasing by $500 billion a year and baby boomers’ retirement looming, the enormous cuts needed to put the government’s house back in order would have to come from the largest programs, Mr. Greenspan said, including the huge retirement programs that in a few years will turn the government primarily into a pension provider.

“My real concern is that when the time comes to start to pay these benefits, we’re going to find that we are in very serious fiscal difficulty,” he said.

“We’re going to have to relook at some of the entitlement spending” and consider raising the Social Security and Medicare retirement ages by indexing them to longevity as well as trimming yearly inflation adjustments for the programs, he said.

Social Security cost-of-living increases are tied to the Consumer Price Index, which Mr. Greenspan believes overstates the rate of inflation.

Mr. Greenspan stressed that he is talking only about curbing the rate of growth in benefits, not actually cutting them from current levels.

“I’m not saying we’re going to renege on any of those benefits; we cannot and we will not,” Mr. Greenspan said. “But I do think it’s important for the people who are retiring to have a sense of security that what is being promised to them as they retire will indeed be there.

“Everyone is looking at the issue only of the discretionary spending part of the budget,” he said, but simple “arithmetic” dictates that benefits will have to be trimmed.

Social Security, with more than $450 billion in spending a year, is the most expensive program, followed by defense at $400 billion, Medicare at $260 billion and Medicaid at $150 billion.

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