Deficit spending seenas path to budget crisis

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The nation faces a future of economic stagnation, rising interest rates and budgetary crisis unless Congress takes major steps to cut deficit spending, Federal Reserve Chairman Alan Greenspan warned yesterday.

In his most stark assessment of the consequences of "unsustainable" budget deficits that hit $412 billion last year, the Fed chairman told the House Budget Committee that Congress will not be able to "grow out of the deficit" and that the only solution is to cut spending, curb Social Security and Medicare benefits and possibly even raise taxes a little or allow some tax cuts to expire.

"Our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken," he said. "The fundamental fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age.

"Very grave damage to the economy" could result in particular if Congress does not get a handle on the runaway growth in Medicare spending in the next decade that will result from increased use of health care by an aging population and more expensive medical technologies, procedures and drugs, he said.

"If we effectively create very large deficits and we are unable to bring them [down] in a reasonable period of time, we will find that we will very significantly destabilize the system," he said.

"Interest rates would rise as a consequence, and we would have very grave difficulties in restoring balance to the American economy."

The inevitable rise in interest rates, he added, at some point might make it difficult to keep servicing the government's debt, which totals $4 trillion, raising the possibility of a budgetary crisis or paralysis.

"The system becomes fiscally destabilizing, and what you end up with is probably a stagnant economic system."

Although the Fed chairman did not see any immediate problems in financing the nation's large and quickly growing debts to the rest of the world, he warned that "down the line," foreign central banks and other creditors might balk at providing more loans.

The strains facing the Social Security and Medicare retirement programs, he stressed, will begin when the baby boom generation starts retiring in three years, and curbs in benefits will have to be made to prevent funding shortfalls even if Congress approves a system of private accounts for younger workers.