Greenspan: Budget Deficits Pose 'Significant' Risks

Good short-term prospects for the U.S. economy should not distract from huge looming fiscal strains that pose "significant" economic risks, Federal Reserve Chairman Alan Greenspan said on Friday in a renewed warning on budget deficits.

The departing U.S. central bank chief said while U.S. spending on defense and homeland security will not stay at the current pace forever, "our budget position will substantially worsen in the coming years unless major deficit-reducing actions are taken."

"In the end, the consequences for the U.S. economy of doing nothing could be severe," the Fed chief warned in remarks prepared for delivery to a Federal Reserve Bank of Philadelphia conference.

Greenspan urged reinstatement of congressional rules on budget restraint, but said these alone would not be enough to bridge gaps in U.S. health and retirement programs expected as the baby boom generation retires. Nor was it advisable to fix things using taxes alone.

"Tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base," he said, reiterating his conviction that the government should seek to "close the fiscal gap primarily, if not wholly, from the outlay side."

While Greenspan has never shied from weighing in with comments about the fiscal side of policy, his heir apparent Ben Bernanke said last month he would refrain from making specific recommendations on tax and spending policies.

Bernanke, asked during his Senate Banking Committee confirmation hearing about his opinion of "pay-as-you-go" budget rules, said the question was beyond his authority.

Nominated by Bush in October to lead the Fed, Bernanke won the Senate Banking Committee's nod and awaits confirmation from the full Senate. Greenspan steps down as chairman on January 31.

Greenspan -- whose remarks to Friday's Fed conference were pre-recorded as he is in London for a G7 meeting -- said U.S. economic activity is expanding "at a reasonably good pace" into 2006 despite disruptions from hurricanes that battered the southern United States in a record storm season.

He warned, however, that "this period of relative stability will soon end" as demographic pressures take hold.

"I fear that we may have already committed more physical resources to the baby boom generation in its retirement years than our economy has the capacity to deliver," he said, adding changes to Social Security and other programs "should be made sooner rather than later" to ease disruption.

Raising the national saving rate is also an important stop to meet retirees' needs "without unduly curbing the standard of living of our working age population," he said.