WASHINGTON - Federal Reserve Chairman Alan Greenspan said Wednesday that Congress has lost the ability to manage crucial long-term budget issues and new mechanisms are needed to keep future costs from ballooning beyond the nation's ability to pay.
Greenspan defended President Bush's three rounds of tax cuts, saying they had helped ensure that the 2001 recession was mild and brief and have provided critical stimulus to keep the current rebound on track.
But he warned that rising deficits could become a problem over the next decade as Social Security and Medicare costs escalate with the retirement of baby boomers.
"Looking forward, fiscal policy is going to become a very critical issue on the agenda for macroeconomic policy," Greenspan told the House Financial Services Committee.
Greenspan again supported a return to pay-as-you go policies that would require Congress to offset future increases in government spending or new tax cuts with cuts in other government programs or tax increases.
The administration supports reinstituting the pay-as-you-go mechanism for spending but not for tax cuts, because it would complicate Bush's goal of making permanent the 2001 tax cuts. The cuts are due to expire in 2011.
A decade-long requirement for pay-as-you-go budgeting expired in 2002.
Greenspan says the massive tax cuts that have been pushed through helped the country avoid a recession.
Greenspan suggested that Congress should go beyond pay-as-you-go provisions to provide ways to rein in government spending or tax decisions if the costs of those actions balloon above the original estimates.
"You need a mechanism which adjusts programs as you move forward," Greenspan told the panel. "We also have to begin to think of how we nudge programs back to where we thought we were pushing them in legislation, either through triggers or sunset legislation."
Greenspan said this was crucial because so many of Congress' spending and tax decisions go well beyond the timeframe of an annual budget.
"What we are missing is a process which essentially can address a long-term outlook," Greenspan said. The government's ability to make long-term forecasts of either tax revenues or government spending "is clearly quite poor."
Greenspan lent Bush critical support for his drive to enact a $1.3 trillion, 10-year tax cut in 2001, but argued then that any such package should be accompanied by a trigger mechanism that would rescind tax cuts in later years if economic forecasts changed. Greenspan's suggestion was rejected by Congress.
Bush's original tax cut was passed at a time when the government was predicting budget surpluses over the decade would total $5.6 trillion. Those surpluses have turned into huge deficits under the impact of the tax cuts, a recession and the billions of dollars spent to fight a global war against terrorism.
Democrats tried to get Greenspan to specifically call for reductions in Bush's tax cuts to help bring soaring deficits under control, but Greenspan said it is up to Congress to make decisions on tax levels.
"I would prefer lower spending and lower taxes and lower deficits," Greenspan said.
Greenspan's appearance before the House panel followed his testimony Tuesday before the Senate Banking Committee to deliver the Fed's midyear economic outlook.
Greenspan stressed that the current economic rebound appeared to be on a firm footing, despite a "soft patch" of activity in June.
He said that while a recent spurt in inflation appeared to be based on transitory factors such as a jump in energy costs, the Fed was prepared to move interest rates up more quickly than its planned "measured" pace if necessary.
The Fed increased its target for the federal funds rate, the rate on overnight bank loans, for the first time in four years on June 30 to 1.25 percent, up from a 46-year low of 1 percent. Most analysts believe Fed officials will boost the funds rate by another quarter point at their Aug. 10 meeting and continue with further quarter point moves into next year.
In a separate appearance, Fed Vice Chairman Roger Ferguson said that economists are not sure why the last two economic recoveries following the 1990-91 recession and the 2001 recession were characterized by such weak job growth in the beginning months.