Federal Reserve Chairman Alan Greenspan said yesterday that Congress should resist a spending splurge and use the burgeoning federal surpluses primarily to reduce the $5.7 trillion national debt.
To fashion a more credible budget policy, Congress should stop using sleight of hand to evade the spending caps it enacted in 1997 or raise those caps, if necessary, to more realistic levels, he said at a renomination hearing before the Senate banking committee.
“The central bank … is interested in as much fiscal restraint as can conceivably occur,” he said. “Greater fiscal restraint usually … makes it easier” for the Fed to do its job, he said, suggesting that the central bank takes the stringency of budget policies into account when deciding whether to raise interest rates.
The Fed is expected to raise rates for a fourth time since June after a meeting of its rate-setting committee Wednesday.
Few senators questioned the Fed’s rate-raising drive at the hearing. Most praised Mr. Greenspan lavishly for his success at steering the economy in the last 12 years.
Sen. Charles E. Schumer, New York Democrat, called Mr. Greenspan “a national treasure.” Sen. Phil Gramm, Texas Republican and the committee’s chairman, said Mr. Greenspan is presiding over “a golden age” and said his nomination for a fourth term as chairman should clear the committee and possibly the full Senate Tuesday.
Mr. Greenspan appeared awed by the outpouring, and countered with some praise of his own for the role of both Congress and the Clinton administration in turning federal budget deficits that were more than $200 billion a decade ago into surpluses of nearly the same size today.
But he also peppered his remarks with some pointed advice and observations.
He urged Congress to resist drafting plans to spend an estimated $2 trillion in surplus income tax revenues expected over the next 10 years, while acknowledging that the political pressures to shower that money on new programs will be intense.
Already, Congress has all but officially abandoned the discretionary spending caps it enacted in 1997, using various accounting gimmicks and budgetary evasions so it could take advantage of the large and growing surpluses generated by the booming economy.
Last year’s appropriations bills exceeded the caps by $26 billion, and Congress is likely to bust the caps by even more this year $49 billion, said Sen. Tim Johnson, South Dakota Democrat.
“If you’re going to have a cap, it should be adhered to,” Mr. Greenspan said. “I would be most concerned if the integrity of the system became undermined because they were unable to be enforced because they no longer had the support of a majority of Congress.
Since the existing caps have become “meaningless,” he said, “it’s probably wiser to alter them, but then find a means by which we don’t get involved in spurious mechanisms to evade them.”
Mr. Greenspan declined to criticize specific spending programs and tax-cut plans put forth by President Clinton and presidential candidates. The White House so far has floated plans to spend more than $200 billion on new programs providing prescription drugs for the elderly, expanding health care coverage to the uninsured, and a variety of other causes.
But Mr. Greenspan said that to resist such appealing ideas, Congress should enact a program that devotes the surpluses to paying off the national debt, as has been proposed by House Speaker J. Dennis Hastert, Illinois Republican.
The surpluses could be used to increase spending or cut taxes only after such a program’s debt-reduction requirements have been met, he said. That way, Congress won’t have committed itself to paying benefits if the surpluses projected by the Congressional Budget Office fail to materialize, he said.
Mr. Greenspan revealed that the central bank has been trying to determine the cause of the federal surpluses and has concluded that a large part is from the capital-gains taxes American investors are paying on their substantial gains in the stock market in recent years.
Since such gains could diminish or disappear in future years. Congress should be careful about making plans that depend on them, he said.
Still, no one is certain what is causing the surpluses or whether they will continue, he said, noting they could entirely disappear or end up being twice as large as what the budget office is projecting.