Greenspan stresses the need for spending cuts to reduce US deficit

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The Independent Online

Burgeoning healthcare costs will make current fiscal policy "unsustainable", Alan Greenspan, the chairman of the US Federal Reserve, warned yesterday.

Burgeoning healthcare costs will make current fiscal policy "unsustainable", Alan Greenspan, the chairman of the US Federal Reserve, warned yesterday.

In testimony to House of Representatives budget committee, Mr Greenspan said the government had probably promised more to the "baby-boomer" generation than the economy would be able to deliver.

"If existing promises need to be changed, those changes should be made sooner rather than later," he said.

He said the budget position was unlikely to improve substantially in the coming years unless "major deficit-reducing actions" were taken. He urged politicians to favour spending cuts over tax rises.

"Unless we attain unprecedented increases in productivity, we will have to make significant structural adjustments in the nation's major retirement and health programmes," he said.

However the dollar rose against the euro as the market focused on his comment that the economy was growing at a "reasonably good pace".

On the other side of the Atlantic, a member of the Bank of England's Monetary Policy Committee said the neutral level of UK interest rates has probably fallen in recent years. Marian Bell said the Bank's success in fighting inflation had pushed down the rate of interest consistent with growing the economy at trend without triggering a rise in inflation.

But she declined to a put a figure on the rate and said it would be "risky" for the Bank to assume it was a permanent rather than temporary fall.

Her comments are expected to be seen as a sign Ms Bell is unlikely to call for a rise in rates simply to get borrowing costs back to a "neutral" level.

They contrast with recent remarks by Paul Tucker, the lone member of the MPC to vote for a rate rise this month, who last year said the neutral rate was between 5 and 5.5 per cent. Rates are currently 4.75 per cent.

In a speech to business leaders and academics at Cranfield University in Bedfordshire, Ms Bell said rates had peaked at successively lower levels - 15 per cent in 1989, 7.5 per cent in 1998 and 6 per cent in 2000.

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