Discipline, Not Deficits
Subject Budget deficit
Topic Taxes, Spending, and Deficits
Key Words Recession, Economic Growth, Budget Deficit
News Story

Alan Greenspan, chairman of the Federal Reserve, testified on economic policy issues before the House Budget Committee. With a projected budget deficit of $157 billion in fiscal year 2002, Greenspan cautioned Congress to keep the federal budget deficit under control. Greenspan argued that even though interest rates are at a 40-year low, higher interest rates would result from a breakdown of budget discipline. As soon as financial markets perceive a change in the long-run fiscal outlook, Greenspan believes that interest rates will change immediately. Economic growth would also slow.

Members of the Committee questioned Mr. Greenspan about the Bush tax cut enacted last year. They specifically asked whether it was advisable, in light of the budget deficit, to freeze or even roll back scheduled tax cuts. Last year, Greenspan had advocated the use of triggers tied to the budget to initiate various phases of the 10-year tax cut. Mr. Greenspan advised against modifying the scheduled tax cuts. He argues that two-thirds of the tax cut's total value had been implemented and any change would be disruptive to taxpayers.

This year's budget deficit resulted from an economic recession, a fall in stock prices, the war on terrorism and the initial phase of the tax cut. According to Greenspan, the economy appears to have withstood a number of setbacks, but the depressing effects of these events on the budget still linger.

Mr. Greenspan emphasized the need for budget discipline. Any tax or spending proposals should fit within a long-term budget plan for achieving budget goals. He strongly urged Congress to renew rules related to the budget process that are scheduled to expire this month. These rules require any spending increases or tax cuts to be offset by revenue increases unless approved by a 60-vote majority in the Senate.

(Updated October 10, 2002)


What impact(s) did the fall in stock prices have on income tax collections? Explain.

2. How does a recession affect tax collections? How does it affect government spending?
3. Greenspan that continued and growing government deficits would lead to higher interest rates. How would higher interest rates affect investment? Economic growth?
Source Richard W. Stevenson, "Greenspan Backs Budget Control and the Tax Cuts," The New York Times, September 13, 2002.

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