Deficit Imperils Standard of Living, Greenspan Says

The budget deficit is eating away at the foundations of the nation’s economic strength and threatens the future living standard of Americans, Federal Reserve Board Chairman Alan Greenspan told Congress on Thursday.

“The deficit already has begun to eat away at the foundation of our economic strength,” and the need to reduce the deficit has become ever more urgent, Greenspan told the House Ways and Means Committee.

“I do not underestimate the difficult decisions that you must make if we are to achieve the necessary reduction in the deficit,” he said. “But allowing deficits to persist courts a dangerous corrosion of our economy and risks potentially significant reductions over time in our standard of living.”

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

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

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

The gap between the government’s spending and its receipts came to $155.1 billion in the year ended Sept. 30 and is expected to hit $161.5 billion this fiscal year.

Greenspan said he does not favor a tax increase and that legislators should strive to reduce the deficit to the fiscal 1990 target of $100 billion through spending cuts.