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Greenspan Cautions Against Rising Budget Deficits - 2003-02-12

Federal Reserve Board Chairman Alan Greenspan has sharpened his warnings on the danger of rising budget deficits in the United States.

Mr. Greenspan distanced himself further from the tax cut proposals that are the centerpiece of President Bush's economic program.

During the second day of testimony before congressional committees, Mr. Greenspan repeated his concern about the budgetary impact of tax cuts and increased spending. Two years ago the central bank chief enthusiastically supported Mr. Bush's substantially enacted tax cut proposal.

But after three years of surpluses, the recession and stock market collapse has turned government finance back into deficit. And the prospect is for large and expanding deficits during the next few years.

Mr. Greenspan said lawmakers should be aware of the large demands on the budget that will come as the post-World War II, baby boom generation retires and begins drawing old age pensions. "When you get beyond this decade to 2011, 2012 the ratio of debt to GDP begins to rise in a very worrisome manner," he said.

Mr. Greenspan repeated his assertion that the risk of war with Iraq is undermining business confidence and holding back economic activity. He was asked about the economic impact of rising oil prices and possible supply disruptions.

"Fortunately, in the immediate period ahead worldwide consumption is in a seasonal decline. Starting in April, May, and June you get a much lower level of world consumption, which means that if we had a shutdown its effect on price would be modest, but as you point out, if it went on for a year it would be troublesome," he said.

Oil prices have risen above the $35 per barrel level. Rising oil prices at the time of the 1991 Gulf war pulled the world economy into recession.

Mr. Greenspan said that with interest rates at historic lows, a strong housing market and a rush for mortgage refinancings have been important in maintaining economic growth.