Tax Cuts Will Stave Off Deflation Says Greenspan

by Mike Godfrey, Tax-News.com, Washington

06 June 2003

Federal Reserve Chairman Alan Greenspan has delivered a relatively upbeat assessment of the US economic outlook, forecasting that the recently enacted $350 billion tax cuts should soon translate into increased consumer spending, and spur economic growth.

In a speech given to a group of international central bankers in Berlin via a satellite link-up, Greenspan explained that the latest monthly statistics suggested the economy had stabilized somewhat, and that consequently the risk of deflation was now receding. The Fed chief remarked to the group that deflationary risks were not "anything significant" and that the data did not present anything "we need to be concerned about."

Although the influential US central banker has striven to remain politically neutral on the subject of President Bush's economic stimulus package, his words represent a shift in tone from previous comments, which have focused on the more negative impact of the tax cuts.

In testimony given to a Congressional committee some weeks ago, Greenspan pointed to a recent study by federal economists, which revealed a close correlation between rising budget deficits and rising interest rates. "There are powerful reasons to suspect that the elimination of the double taxation of dividends and cuts in marginal rates will elevate long-term productivity," Greenspan told lawmakers at the time, although he warned that: "If, however, in the process we get a significant increase in deficits, which induce a rise in long-term interest rates, that will be a significant undercutting of the benefits achieved by tax cuts,"

Whilst never opposing the tax cuts outright, Greenspan has always maintained that they should be matched by equivalent cuts in spending if fiscal stability is to be maintained.

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