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Greenspan Urges Caution on Budget

March 4, 1998

WASHINGTON (AP) _ Federal Reserve Chairman Alan Greenspan urged Congress today to exercise caution in deciding how to deal with projected budget surpluses, arguing that while an ``exemplary″ economy has produced nothing but pleasant surprises in recent years, the situation could change quickly.

Testifying before the House Budget Committee, Greenspan said that he believed the best thing Congress could to help the economy’s prospects in coming years was to put the federal budget into ``significant surplus.″

He called this the ``surest and most direct way of increasing national saving,″ which he said would promote lower interest rates throughout the economy and thus spur productivity-enhancing investments by businesses.

Greenspan repeated observations he made last week in delivering his semi-annual report on monetary policy to Congress that the impact of the Asian crisis loomed as the biggest uncertainty for the U.S. economy.

``The exemplary performance of the U.S. economy in 1997 will be hard to match,″ he said. ``The key question going forward is whether the restraint building from the turmoil in Asia will be sufficient to check inflationary tendencies that might otherwise result from continued strength of domestic spending and tightening labor markets.″

Private economists last have interpreted Greenspan’s views as underscoring their view that the central bank will leave interest rate policy unchanged for at least through the middle of this year, until there is a better reading of Asia’s impact on the United States.

Greenspan’s testimony to the House budget writers came a day after the Congressional Budget Office released an updated forecast projecting an $8 billion federal surplus in the current budget year, ending three decades of deficits.

The new forecast was an improvement from an assessment the CBO released just two months ago that the deficit for the current budget year, which ends Sept. 30, would be $5 billion. The Clinton administration last month, in submitting its budget request to Congress, estimated this year’s deficit at $10 billion.

Greenspan praised both the CBO and the administration for using conservative assumptions in making deficit forecasts but he cautioned that even these forecasts could prove wrong. He noted that a year ago, both Congress and the administration were making projections for 1997 that turned out to be $100 billion above the actual deficit of $22 billion.

While higher-than-expected tax receipts accounted for the pleasant narrowing of the deficit over the forecasts, Greenspan noted that at the beginning of this decade government revenues ``consistently fell short of expectations″ and he urged caution in counting on higher tax receipts to last.

``We must remain cautious about extrapolating recent favorable tax inflows into the future,″ he said, in part because economists are at a loss to explain the reasons that revenue projections have surged so much in the past few years.

``These uncertainties underscore the need for caution as you move ahead in your work on the 1999 budget,″ Greenspan said. ``There is no guarantee that projected surpluses over the next few years will actually materialize.″

Greenspan told the budget committee that given the need to pay Social Security and Medicare costs early in the next century for retiring Baby Boomers, ``we should be aiming for budgetary surpluses and using the proceeds to retire outstanding federal debt.″

Clinton challenged Congress in his State of the Union message not to spend any of the surpluses until the projected shortfall in Social Security was fixed. But Republicans have accused the president of using this challenge as a clever ploy to mask the fact that his 1999 budget included significant spending increases.

On Tuesday, House Budget Committee Chairman John Kasich, R-Ohio, said House Republicans were exploring the idea of giving part of future budget surpluses to people who are still working to allow them to make contributions to individual retirement accounts.

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