Federal Reserve Chairman Alan Greenspan (search) said Wednesday the U.S. economy is growing at a "reasonably good pace" but urged Congress to move quickly to fix the country's budget deficits and its Social Security and Medicare problems.
"Addressing the government's own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base," Greenspan said in testimony prepared for delivery to the House Budget Committee (search).
"The exact magnitude of such risks is very difficult to estimate, but, in my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side."
Greenspan again endorsed the key part of President Bush's Social Security (search) overhaul to set up private accounts, but he stressed that much more needed to be done to put the giant retirement program and Medicare, which he said faced even more severe financial strains, on a more sound footing.
Last month, the Fed chairman had urged a go-slow approach on the narrower issue of allowing younger people to put a portion of their Social Security payroll taxes into personal retirement accounts.
The influential central bank chief urged Congress anew to reinstate lapsed rules requiring tax cuts and spending to be offset
He said the deficit should narrow somewhat as the economy expands and incomes rise, noting that the ramp-up in defense and homeland security spending is not expected to continue indefinitely.
"But, as the latest projections from the administration and the Congressional Budget Office (search) suggest, our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken," Greenspan said.
According to the latest CBO estimates, the budget will still be in the red a decade from now.
The Fed chief also said solid growth in productivity — or worker output of goods and services per hour — would help ease budget strains.
"But unless productivity growth far outstrips that embodied in current budget forecasts, it is unlikely to represent more than part of the answer," Greenspan said, adding he could not rule out the possibility that productivity growth will fall short of projections.
Greenspan reiterated that he supports President Bush's push for setting up personal retirement accounts by diverting up to 4 percentage points of payroll taxes into the new accounts.
Diverting the payroll taxes into the Social Security trust fund, he said, had merely allowed the government to run larger budget deficits. Greenspan said that switching to the private accounts would be a way to bolster the nation's low savings rate.
Greenspan warned Congress that every year it delayed would make fixing the problem harder, especially after the baby boomers begin retiring.
"The one certainty is that the resolution of the nation's unprecedented demographic challenge will require hard choices and that the future performance of the economy will depend on those choices," Greenspan said.
The Fed chief said that unless growth in the huge benefit programs is restrained, these programs will require more and more government resources, rising from about 8 percent of the total economy currently to 13 percent by 2030.
"In the end, the consequences for the U.S. economy of doing nothing could be severe," he said.