Greenspan: Budget deficits bigger threat than trade imbalance

Associated Press
Published March 11, 2005

WASHINGTON - Federal Reserve Chairman Alan Greenspan said Thursday that future budget deficits pose a bigger risk to the economy than record trade imbalances and the country's extremely low savings rate.

In a wide-ranging speech, Greenspan said he believed the United States' flexible economy would be able to deal with current concerns over trade and savings.

"The resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit," Greenspan said in prepared remarks to the Council on Foreign Relations in New York.

The Fed chief said the budget deficit is a problem because it is projected to rise significantly as a wave of baby boomers start to retire in 2008.

"Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability," Greenspan said.

Greenspan has been beating the drum about the need for policymakers on Capitol Hill and the White House to get the nation's fiscal house in order.

While Greenspan has endorsed President Bush's move to set up personal investment accounts as part of an overhaul of Social Security, he has called for a go-slow approach to setting up such accounts. His concern is that massive government borrowing to bring them about could push up interest rates.

Greenspan also suggested that benefit cuts would be required to deal with looming funding problems within Social Security.

"What we know for sure, however, is that the 30-million baby boomers who will reach 65 years of age over the next quarter century are going to place enormous pressures on the ability of our economy to supply the real benefits promised to retirees under current law," Greenspan said.

The federal government ran a record monthly deficit of $113.9-billion in February, a sizable worsening of the budget picture compared to a rare surplus recorded in January, the Treasury Department reported Thursday.

However, even with the February deficit, the red ink for the first five months of the budget year is running 2.2 percent below the red ink for the same period a year ago. The total deficit from October through February this year was $223.4-billion compared to $228.5-billion for the previous period.

The Bush administration is projecting that this year's federal deficit will hit an all-time high in dollar terms of $427-billion, surpassing last year's record of $412.8-billion.

However, the Congressional Budget Office is projecting a lower deficit for this year of $394-billion, including Bush's supplemental requests to Congress for funding the Iraq war, and many private economists are also forecasting that this year's deficit will be slightly lower than last year's record.