[A-List] US state: ruling class split

["Keaney Michael" <Michael.Keaney@xxxxxx>]

More on what appears to be a developing split at the top of the US, as
Greenspan articulates the Rubin/Summers line against the Bush
administration.


Greenspan warns on rising US budget deficit
By Philip Thornton, Economics Correspondent
The Independent, 13 September 2002

The truce between Congress and the Federal Reserve over US fiscal policy
ended abruptly yesterday as Alan Greenspan warned that mounting budget
deficits would eventually trigger hikes in interest rates.

The Fed chairman told US lawmakers a return to "budgetary profligacy"
would harm hopes of a long-term recovery for the American economy.

He also revealed that the Fed would slash its growth forecasts and
warned the economy was still suffering the effects of terrorist attacks,
stock market slumps and savage cuts in business spending.

"To date, the economy appears to have withstood this set of blows well,
although the depressing effects still linger and continue to influence,
in particular, the federal budget outlook," he said.

The gloomy outlook, combined with an unexpected spike in jobless benefit
claims, knocked confidence on Wall Street where the Dow fell as much as
162 points in morning trade.

Economists said Mr Greenspan's brief comments on the economy gave few
clues to the Fed's decision on 24 September when the markets expect no
policy change. The main thrust of his testimony to the House of
Representatives' budget committee was to urge lawmakers to keep a tight
rein on spending.

"Given the recent change in the budget outlook, the commitment to fiscal
responsibility that has served us so well must be re-established," he
said.

He warned that a failure to renew tight laws on budget control would be
a "grave mistake". "If we don't preserve the budget rules and reaffirm
our commitment to fiscal responsibility, years of hard work could be
squandered," he said.

The Congressional Budget Office predicts the deficit for the fiscal year
to 30 September will hit $157bn (£101bn) after four straight years of
surpluses, and stay in the red until 2005. Mr Greenspan told the
cross-party committee: "An abandonment of fiscal discipline will
eventually push up interest rates, crowd out capital spending, lower
productivity growth, and force harder choices upon us in the future."

But in a major boost for the White House, Mr Greenspan focused his
criticisms on spending policy rather than on the impact of the tax cuts
ordered by President George Bush last year. He rejected suggestions by
Democrats that some of the $1,350bn of tax cuts planned over the next
decade should be rescinded.

"There is a significant segment of the business community who presumably
made capital investment commitments ... expecting that the long-term tax
structure will remain in place," he said. "If you rescinded it they
would consider it a tax increase."

David Sloan, US economist at 4cast in New York, said: "Greenspan has
said the tax cuts were the right thing to do but he does not want any
more. If the White House pushed for more it could not rely on his
support."

Meanwhile the European Central Bank kept its key rate unchanged at 3.25
per cent. Its president, Wim Duisenberg, said: "The risks to price
stability appear rather balanced. Against this background, the current
level of key ECB interest rates is appropriate."