ounding an increasingly familiar and urgent warning, Alan Greenspan, the chairman of the Federal Reserve, testified today before Congress that the federal budget is on an "unsustainable path" that, if left alone, will cause the economy "to stagnate or worse."
Congress has promised more than it can continue to deliver, he said, and it must quickly make major changes in how it manages its finances, especially as it prepares to shoulder the cost of new programs like the prescription drug benefit and growing demands on Social Security and Medicare. .
In the fiscal year ended Sept. 30, 2004, the federal budget ran a deficit of $412 billion, or about 3.5 percent of the nation's gross domestic product, according to the Congressional Budget Office. Moreover, the size of federal debt relative to G.D.P. has "risen noticeably" since bottoming out in 2001, Mr. Greenspan told the Senate Budget Committee.
Although Mr. Greenspan in 2001 approved the tax cuts that helped take the federal budget from a surplus to its current deficit, he has increasingly pointed to the dangers of the shortfall, saying it can lead to higher interest rates as the government's revenues fall. Congress has nonetheless expanded its spending.
"Every successive testimony, I can see him getting more and more impatient," said David Wyss, chief economist at Standard & Poor's. "It's like, 'Why don't you idiots get this - that you can't continue spending more than you take in?' "
Mr. Greenspan described the economy as healthy but said it faced far too many uncertainties.
For instance, he said, it is nearly impossible to tell how long the approaching waves of retirees will live or how far medicine will advance. This, in turn, will put increasing pressure on the federal budget because of spending on Social Security and Medicare, Mr. Greenspan said.
In 2004, the government spent the equivalent of about 8 percent of G.D.P. on Social Security, Medicare and Medicaid, he said. That share will grow to about 13 percent in 2030, according to projections by the Office of Management and Budget.
"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," said Mr. Greenspan, who in 1983 helped put together the last major revision to Social Security. "If existing promises need to be changed, those changes should be made sooner rather than later" to allow future retirees to adjust their plans, he said. He called today for "a set of procedural restraints on the budget-making process."
These could include limits on discretionary spending and requirements that additions to the budget be balanced by cutbacks elsewhere, he said. Such guidelines were laid out in the Budget Enforcement Act of 1990 but lapsed in 2002.
"The brief emergence of surpluses in the late 1990's eroded the will to adhere to these rules," he added.
As a result, Congress has spent more on the military and created new programs like the prescription drug benefit without trimming enough money from other programs, he said. A better approach would be to make fewer commitments.
Mr. Greenspan did not suggest specific ways to balance the budget, but he has leaned towards cutting spending rather than raising taxes.