Greenspan: There's Room for Tax Cut

Thursday, January 25th 2001, 12:00 am

By: News On 6

WASHINGTON (AP) â€” Federal Reserve Chairman Alan Greenspan, providing critical support for President Bush's efforts to cut taxes, told Congress today that rising estimates of budget surpluses give Congress room to cut taxes.

However, Greenspan suggested that Congress should consider some mechanism to make sure that the tax cuts could be suspended if the revenue projections turn out to be too optimistic in later years.

Greenspan, who previously had expressed a preference for using the surpluses to pay down the national debt, said he still believes debt reduction is the best use for the added revenue. But he said government estimates project more than enough surplus funds to pay off the debt and still cut taxes.

``The sequence of upward revisions to the budget surplus projections for several years now has reshaped the choices and opportunities before us,'' Greenspan said in testimony to the Senate Budget Committee.

``The most recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives,'' Greenspan said. ``Accordingly, the trade-off (between paying down the debt and other possibilities) faced earlier appears no longer an issue.''

Greenspan in his prepared testimony never discussed what size of tax cut Congress should consider. Bush is recommending a $1.6 trillion cut over 10 years, a level that Democrats in Congress have contended is too large.

Even without endorsing Bush's specific tax plan, Greenspan's endorsement of the economic soundness of cutting taxes represented a significant victory for the new administration.

Greenspan, because of his success in managing the country's longest-ever economic expansion, has gained near-cult status on Wall Street and Congress. His comments in favor of tax cuts will certainly be cited as a key endorsement by the new administration.

Bush and his economic advisers have said that because of the steep slowdown the economy is now facing, he may accelerate his tax program in an effort to provide insurance that the country does not slip into a recession.

Greenspan, however, noted the hurdles supporters face in such an approach, given the time it will take Congress to approve any tax reductions.

``Such tax initiatives, however, historically have proved difficult to implement in the time frame in which recessions have developed and ended,'' Greenspan said, referring to an effort made by then-President Ford in 1975 to lower individual taxpayer withholding rates.

He said even this ``easiest of tax changes'' was not implemented until four months after Ford proposed it in May 1975, ``when the recession was officially over and the recovery was gathering force.''

Greenspan was chairman of Ford's Council of Economic Advisers and a number of officials in Bush's administration, including Vice President Dick Cheney and Treasury Secretary Paul O'Neill, held tops posts in the Ford administration.

Greenspan repeated his warnings of the past that Congress should be caution in devoting the budget surpluses to increased government spending because of the difficulty in trimming established government programs if the current budget forecasts turn out to be too optimistic.

He also suggested that Congress should consider some type of trigger that would trim government spending or tax cuts if the budget surpluses aren't as large as currently estimated. He also suggested any tax cuts or spending increases be phased in.

``The reason for caution, of course, rests on the tentativeness of our projections,'' Greenspan said, noting that the drop in the stock market over the past year highlighted the fact that economic conditions can change quickly.

But Greenspan said the last budget forecasts left by the Clinton administration underscored how big the surplus has grown. The Clinton administration's last budget outlook, released last week, put the total surplus over the next 10 years at $5 trillion.

Members of Congress said the Congressional Budget Office is likely to project an even higher $5.7 trillion in its new estimate due out next week. That total includes $2.5 trillion in surpluses in the Social Security program, which both Democrats and Republicans have promised to reserve for bolstering that program to prepare for the retirement of the baby boom generation.

The Federal Reserve announced a surprise one-half point cut in interest rates Jan. 3, citing the need for the stimulus because of the sudden slowdown of the economy late last year. Many analysts believe the Fed will follow that rate reduction with another cut when the central bank meets next Tuesday and Wednesday. However, Greenspan did not address that issue specifically in his prepared testimony Thursday.

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On the Net: Federal Reserve: http://www.federalreserve.gov