Federal Reserve Chairman Alan Greenspan on Thursday voiced support for extending US President George W. Bush's tax cuts, but told lawmakers they should reinstitute rules to ensure they don't drive up the country's debt.
The influential central bank chief recommended finding savings on the spending side to pay for the cuts, and suggested Congress consider scaling back retiree benefits under Social Security and Medicare.
"I am in favor ... of continuing the tax cuts that are in dispute at this particular stage," Greenspan told the Senate Banking Committee in answer to a lawmaker's question, wading into a contentious election-year debate.
Since taking office, Bush has won tax cuts totaling some US$1.7 trillion over 10 years. Unless extended, the reductions will begin expiring at year's end, fully running their course by 2010.
The Fed chairman said he would "argue strenuously" for saving on the spending side to fund an extension. The cost of making the cuts permanent could top US$1 trillion over the next decade.
Testifying for a second day on the Fed's semiannual monetary policy report, Greenspan twinned his backing for tax cuts with a call for renewing expired caps on government spending and so-called pay-go rules, which require tax or spending plans be paid for elsewhere in the budget.
The Bush administration also supports pay-go renewal, but only for spending programs -- not for tax cuts.
Greenspan also urged lawmakers to look closely at Social Security and Medicare. Both programs will come under growing stress as members of the baby boom generation begin to retire.
"I suspect ... we're going to have to relook at some of the entitlement spending outlays," he said. "What we have to do, as difficult as it's going to be, is to relook at some of these commitments that were made."
Greenspan said Congress should consider raising the age at which benefits could be drawn under Social Security and Medicare and tie benefits to an inflation index that advances more slowly than the government's Consumer Price Index.
The Fed chief said he was aware politically difficult choices would be required to put the programs on a sound long-term fiscal footing, but added: "The other alternative is to have legislation which repeals the laws of arithmetic."
Absent a fix, Social Security will begin to pay out more than it collects in taxes by 2018, exhausting its trust fund by 2042. The Medicare program faces similar pressure, with its hospital trust fund projected to run out by 2026.
"Greenspan is more directly linking the trade-off between the tax cut on the one hand and Social Security benefits on the other than I think I've seen from him before," said Brookings Institution economist Peter Orszag, an adviser to the campaign of Democratic presidential front-runner Senator John Kerry.
"The only way you could pay for these tax cuts through lower Social Security benefits would be to reduce benefits for current beneficiaries and those about to retire, a step the Bush administration has specifically ruled out," Orszag said.
Bush's push to make the tax cuts permanent faces stiff opposition from Democrats who say they are skewed toward the wealthy. Kerry has called for their partial repeal.
Greenspan echoed the White House's arguments that letting the tax cuts expire would amount to a tax increase that could hit economic growth.
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