US Federal Reserve Chairman Alan Greenspan yesterday took an indirect swipe at the Bush administration's economic policies, warning that "substantial and excessive" federal budget deficits would set back efforts to boost the economy sufficiently to bring down the unemployment rate. Conor O'Clery, North America Editor, reports from New York.
Mr Greenspan's comments, on the second day of testimony to a Congressional committee, come after the White House projected a staggering $455 billion (€407 billion) budget deficit in the current fiscal year, $150 billion more than the Bush administration projected in February.
"There is no question that if you run substantial and excessive deficits over time you are draining savings from the private sector," Mr Greenspan said. "There is no question that we need to come to grips with this deficit question."
The US dollar rose to its highest level in over two months against the euro yesterday after Mr Greenspan's assessment that the US "could very well be embarking on a period of extended growth" and that interest rates would remain at historic lows. It fell back later in New York with Mr Greenspan warning that the level of deficit spending was unsustainable in the long term.
US Treasury Secretary John Snowe reiterated the Bush administration's strong dollar policy when talking to reporters in London yesterday, and forecast that US growth would be just under 2 per cent in the second quarter, rising to 3 and 3.5 per cent in the last two quarters and to over 4 per cent in 2004.
He admitted that the soaring US deficit was "worrisome" but claimed it was manageable.
The unexpectedly huge deficit, representing 4.2 per cent of the total economy, has created a political storm in the US. Senator John Edwards, a Democratic candidate for president, said the president's policies, which include huge tax cuts, were like quicksand: "they keep sucking the nation deeper and deeper into debt".
The Republican chairman of the House Budget Committee Mr Jim Nussle said the deficit, down from a budget surplus of $127 billion two years ago, was caused by spending, not tax cuts.
Cautioning against high deficits, Mr Greenspan noted that 75 million American baby boomers will begin retiring at the beginning of the next decade, making severe demands on the Social Security and Medicare programmes.
The benefits already promised have created a situation where Congress has promised a level of spending "in excess of our capability to finance it", the Fed chairman said. "When we get into the period beyond 2010, 2011, 2012, we are running into potentially serious problems."
