Federal Reserve Chairman Alan Greenspan said the US economy should grow faster once tensions with Iraq are resolved and doesn't need the added boost of a tax cut such as the one proposed by President George W. Bush.
The possibility of war "is hanging very heavily on economic decision making and thus economic growth," Greenspan told the Senate Banking Committee. If business spending doesn't pick up after the conflict is resolved, interest rates and taxes "will doubtless move higher on the policy agenda."
There's likely no need for now to stimulate the economy more through the Fed's monetary policies or the government's budget plans, the chairman said.
Bush is pushing a combination of tax cuts that would cost US$1.3 trillion over 10 years. Some Democrats say the proposal would benefit mainly the rich, do little to aid growth and swell the national deficit.
"I am not one of those who is convinced that stimulus is desirable policy at this point," Greenspan said. "I support the president's proposal on eliminating the double-taxation of dividends not as a short-term stimulus measure, but as long-term good corporate tax policy and something which would add to the long-term flexibility and potential growth of the economy."
With the budget deficit forecast to hit a record US$307 billion next year, the chairman urged care not to let the shortfall "get out of hand."
"The deficit must be maintained at minimal levels," he said.
Senate Democratic Leader Tom Daschle called Greenspan's testimony the "kiss of death" for Bush's tax-cut plan, and new Treasury Secretary John Snow vowed to step up his effort to convince Congress to pass the measure.
"We've only begun to sell the package -- we've just begun the program -- so I think it's a little early to be saying this package isn't going to go anywhere," Snow said in his first briefing with reporters since he was sworn in last week.
Christopher Low, chief economist at FTN Financial in New York, said the biggest surprise was Greenspan's "implied opposition to Bush tax cuts."
The US economy is likely to accelerate during the course of this year, the Fed said in its twice-yearly economic forecast accompanying Greenspan's testimony.
"We're not as optimistic as the chairman or the FOMC [Federal Open Market Committee]," said Gerald Cohen, a senior economist at Merrill Lynch & Co in New York. "It's not clear to us that Iraq is going to be the catalyst to get the economy back to near potential" once the conflict is resolved.
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