Greenspan Issues Urgent Warning About Deficit

Federal Reserve Board Chairman Alan Greenspan told a House panel today that the need to cut the federal deficit is pressing, as government overspending has begun to erode the nation’s economic foundation.

“The deficit already has begun to eat away at the foundation of our economic strength,” Greenspan told the House Ways and Means Committee. “And the need to deal with it is becoming ever more urgent.”

Greenspan said that some of the negative effects of the deficit have been postponed but that they cannot be avoided indefinitely, and he warned the legislators that the day of reckoning is nearing.

More than half of Americans’ savings were absorbed by the combined federal, state and local government deficits in the 1980s, he told the panel.

Furthermore, higher interest rates associated with increased Treasury borrowing have reduced private investment, which is key to building factories and modernizing other parts of the economy.

‘Dangerous Corrosion’

Although foreign investment has helped offset the effect of a low U.S. savings rate of around 3% of disposable income, Greenspan cautioned that “looking ahead, the continuation of inflows of foreign savings at current levels is questionable.

“I do not underestimate the difficult decisions that you must make if we are to achieve the necessary reduction in the deficit,” he told the congressional panel.

“But allowing deficits to persist courts a dangerous corrosion of our economy and risks potentially significant reductions over time of our standard of living.”

The gap between the government’s spending and its receipts reached $155.1 billion in the year ended Sept. 30. In the past, Greenspan has said he favors spending cuts over higher taxes as a means to cut the deficit, but he said the method matters less than the need to bring it down.

Discussing the rate of growth this year, Greenspan said the U.S. economy is more likely to expand by 2.9%, as estimated by the Congressional Budget Office, than by the 3.5% projected by the Reagan Administration in its budget.

He noted that it is difficult to be precise. “Anyone who can forecast real growth within half a percent a year in advance deserves to get a medal,” Greenspan said.

The central bank and the nation’s investment community would like to see growth of around 2.5% a year, a moderate pace that does not nurture inflation. In testimony last week, the Fed chairman told Congress the current 4.5% inflation rate is clearly too high.

Greenspan told the panel he expects short-term interest rates this year to exceed the levels forecast in the 1990 budget.