- The Washington Times - Thursday, February 12, 2004

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.

“The arithmetic doesn’t work,” Mr. Greenspan said. “I raise these issues largely because I think we have … constructed a good deal of the benefit structure over the last quarter-century without a real, firm look at whether or not the real resources were there to meet those benefits.”

While many senators at the hearing said they want to balance the budget and curb spending, no one voiced support for the curb in entitlements suggested by Mr. Greenspan.

Sen. Paul S. Sarbanes, Maryland Democrat, was incredulous that Mr. Greenspan advocated $1 trillion in spending cuts to make Mr. Bush’s tax cuts permanent.

“How do you take it out on the expenditure side?” he asked. “At this point, even if you just froze expenditures — and we have all of these expenditures, in Iraq and homeland security — you’d still be running up an additional over $1 trillion deficit.”

Extending the tax cuts “will undermine our future fiscal strength in terms of dealing with the very problem that you just spent a few minutes outlining for us,” Mr. Sarbanes said.

While President Bush and congressional Republicans have proposed reinstating “pay as you go” rules only for new spending programs, Mr. Greenspan said they should apply to tax cuts as well.

He said he agreed with Mr. Sarbanes that Congress needs to “show restraint on both spending and tax cuts” to address the deficit, though spending cuts should be considered first.

“The budget-deficit problem needs to be resolved primarily or fully on the expenditure side,” he said. “We do not know the extent to which increased taxes will inhibit the growth of the [economy] and hence the revenue base. We have to be quite careful.”

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