Greenspan warns on rising US budget deficit

The truce between Congress and the Federal Reserve over US fiscal policy ended abruptly yesterday as Alan Greenspan warned that mounting budget deficits would eventually trigger hikes in interest rates.

The Fed chairman told US lawmakers a return to "budgetary profligacy" would harm hopes of a long-term recovery for the American economy.

He also revealed that the Fed would slash its growth forecasts and warned the economy was still suffering the effects of terrorist attacks, stock market slumps and savage cuts in business spending.

"To date, the economy appears to have withstood this set of blows well, although the depressing effects still linger and continue to influence, in particular, the federal budget outlook," he said.

The gloomy outlook, combined with an unexpected spike in jobless benefit claims, knocked confidence on Wall Street where the Dow fell as much as 162 points in morning trade.

Economists said Mr Greenspan's brief comments on the economy gave few clues to the Fed's decision on 24 September when the markets expect no policy change. The main thrust of his testimony to the House of Representatives' budget committee was to urge lawmakers to keep a tight rein on spending.

"Given the recent change in the budget outlook, the commitment to fiscal responsibility that has served us so well must be re-established," he said.

He warned that a failure to renew tight laws on budget control would be a "grave mistake". "If we don't preserve the budget rules and reaffirm our commitment to fiscal responsibility, years of hard work could be squandered," he said.

The Congressional Budget Office predicts the deficit for the fiscal year to 30 September will hit $157bn (£101bn) after four straight years of surpluses, and stay in the red until 2005. Mr Greenspan told the cross-party committee: "An abandonment of fiscal discipline will eventually push up interest rates, crowd out capital spending, lower productivity growth, and force harder choices upon us in the future."

But in a major boost for the White House, Mr Greenspan focused his criticisms on spending policy rather than on the impact of the tax cuts ordered by President George Bush last year. He rejected suggestions by Democrats that some of the $1,350bn of tax cuts planned over the next decade should be rescinded.

"There is a significant segment of the business community who presumably made capital investment commitments ... expecting that the long-term tax structure will remain in place," he said. "If you rescinded it they would consider it a tax increase."

David Sloan, US economist at 4cast in New York, said: "Greenspan has said the tax cuts were the right thing to do but he does not want any more. If the White House pushed for more it could not rely on his support."

Meanwhile the European Central Bank kept its key rate unchanged at 3.25 per cent. Its president, Wim Duisenberg, said: "The risks to price stability appear rather balanced. Against this background, the current level of key ECB interest rates is appropriate."

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence