- The Washington Times - Thursday, May 1, 2003

Federal Reserve Chairman Alan Greenspan yesterday hardened his stance against increasing the budget deficit with a tax cut that is not offset by spending cuts, saying it could harm the economy.

"I find much to support in the president's program, provided it is matched by cuts in spending," the Fed chairman told the House Financial Services Committee while speaking of President Bush's $550 billion tax-cut plan.

"There are powerful reasons to suspect that the elimination of double taxation on dividends and significant cuts in higher marginal rates will elevate long-term productivity," he said.

"If, however, in the process you get significant increases in the deficits, which induce a rise in long-term interest rates, you will be significantly undercutting the benefits achieved from the tax cut."

Mr. Greenspan, who last week accepted Mr. Bush's offer of a fifth four-year term starting in June 2004, flatly rejected the president's argument that higher budget deficits do not necessarily raise interest rates. He cited a recent Fed study that finds a direct relationship between higher government debt and higher rates.

The Treasury this week put pressure on long-term rates, led by the Treasury's bellwether 10-year bond used to determine rates on 30-year mortgages, by announcing a record $79 billion in debt to be financed during the quarter.

Mr. Greenspan's remarks suggested he is concerned that rates will be pushed even higher as growth in the economy picks up later this year if Congress enacts a big tax cut, discouraging a much-needed pickup in business and consumer spending.

Democrats trumpeted the Fed chairman's renewed emphasis on deficits, though they found little comfort in his assault on government spending.

Both parties in Congress have been reluctant to approve spending cuts to pay for a tax cut."The president's plan will only exacerbate the spiraling deficits created by the 2001 tax cut," said Rep. Rahm Emanuel, Illinois Democrat, applauding the Fed chairman's candor while calling for a stimulus program that relies more on increased spending.

The White House continued to highlight Mr. Greenspan's support for the substance of Mr. Bush's plan, though the president has not proposed any offsetting spending cuts that would make it acceptable to the Fed chairman.

White House Press Secretary Ari Fleischer denied that Mr. Green-span's testimony is undercutting Mr. Bush's drive for a large tax cut. "He has said that tax cuts have a stimulative effect on the economy," Mr. Fleischer noted.

In assessing the outlook for the economy, Mr. Greenspan said he remains hopeful that growth, which inched ahead at a sluggish 1.5 percent annual pace in the past six months, will accelerate by year's end, though much depends on businesses abandoning their current reluctance to hire and invest.

"I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that improvement remains uncertain," Mr. Greenspan said.

While consumer confidence snapped back with the end of war in Iraq and a related sharp drop in energy prices, "reports from businesses have not exhibited a similar improvement in tone," he said.

"We need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance."

The central bank remains ready to cut short-term interest rates further, if needed, to ensure the recovery is sustained.

"We still have room in monetary policy if we choose to move," he noted. The Fed's rate-setting committee meets Tuesday.

While the economic outlook continues to be obscured by repercussions of the war, Mr. Greenspan cited several reasons for optimism that businesses will shed their caution and the recovery will become increasingly solid in the months ahead.

He said businesses, like consumers, are experiencing substantial relief from the steep fall in oil prices, from around $38 a barrel in March before the war to around $26 in recent New York trading.

The lower energy costs should help pump up corporate profits and enable businesses to spend and hire more, he said.

The solid rebound in stock prices since the war, accompanied by a drop in the corporate interest-rate spread over Treasury bonds since the beginning of the year, also should help spur capital spending, he said.

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