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Fed chief issues deficit warning

| Friday, April 22, 2005

WASHINGTON -- On the same day Federal Reserve Chairman Alan Greenspan issued a fresh warning about the dangers of bloated budget deficits, Congress considered new tax breaks for the energy industry and an $81 billion measure to pay for U.S. military operations in Iraq and Afghanistan.

The events Thursday illustrated the challenges -- "hard choices," as Greenspan put it -- that policy-makers face in trying to control spending.

Greenspan, who steadily has pressed lawmakers, told the Senate Budget Committee that unless the situation is reversed, the economy in the years ahead could "stagnate or worse."

Meanwhile, the House neared passage of legislation that would give billions of dollars in benefits to energy industries. The Senate prepared to vote on an $81 billion measure for war costs in Iraq and Afghanistan.

Greenspan's plea for fiscal fitness coincides with the deterioration of the government's balance sheets.

In 2000, the government posted a record budget surplus. Four years later, there was a record deficit, $412 billion. The deficit this year is projected to come in at $427 billion.

Even with plans to control deficits by restricting domestic spending, President Bush and Congress project that deficits over the next five years will exceed $200 billion annually. The shortfalls are expected to increase as baby boomers soon begin to retire.

"The harsh reality here is that our fiscal condition is not improving," said Sen. Kent Conrad of North Dakota, the top Democrat on the Senate Budget Committee.

"I think part of the frustration of many of us on this committee is convincing our colleagues that there really is a problem," he said. "And they're probably not going to be convinced unless the American people are convinced. And it's very hard to convince people there is a real threat to our collective economic security when the economy seems to be doing reasonably well."

In the long run, persistently large budget deficits threaten the economy because they can push up interest rates for consumers and businesses. Higher borrowing costs would effect the willingness of consumers and businesses to spend and invest.

Greenspan told senators "the federal budget is on an unsustainable path," in which large deficits will lead to higher interest rates.

Greenspan repeated his support for a return to budgeting policies that would require Congress to offset future increases in government spending or new tax cuts with reductions in other government programs or tax increases.

A decade-long pay-as-you-go provision expired in 2002.

"Our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken," Greenspan said.

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