Greenspan Issues Warning On US Economy

Greenspan issues warning on US economy

PM - Friday, 22 April , 2005 18:36:00
Reporter: Neal Woolrich

PAUL LOCKYER: While there are mixed signals on the Australian economy, its biggest threat at the moment may come from developments in the United States.

Federal Reserve Chairman, Alan Greenspan, says the American economy is heading for trouble unless the Government gets its budget deficits under control.

He's also worried about America's ability to cope with its ageing population, as baby boomers reach retirement age in big numbers, a concern shared in Australia.

Neal Woolrich reports.

NEAL WOOLRICH: When the United States Federal Reserve Chairman, Alan Greenspan speaks, markets around the world listen.

But it seems the US Government doesn't.

Despite the Reserve's repeated warnings, the Bush administration looks set to top last year's record budget deficit of more than $US 400-billion.

Dr Greenspan says a spiralling budget deficit could put the brakes on the US economy.

ALAN GREENSPAN: Indeed, under existing tax rates and reasonable assumptions about other spending, these projections make clear that the Federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that will augment deficits in future years.

NEAL WOOLRICH: ANZ Bank Chief Economist, Saul Eslake, says the US Government's budget, presented to Congress in February, shows no sign of reeling in the deficit.

SAUL ESLAKE: It doesn't include the cost of the Bush administration's promise to entrench the tax cuts of 2001 and 2003 that are, in the legislation, scheduled to expire before the end of the Bush administration's term.

It doesn't include the costs of some $80-billion a year of continuing the US's military operation in Iraq and Afghanistan.

And it makes no allowance for the transitional costs of privatising social security, as the Bush administration wants to do.

NEAL WOOLRICH: Despite his warnings, Alan Greenspan says the US economy is growing reasonably well at the moment.

Those sentiments helped Wall Street's Dow Jones Index rise two per cent overnight, clawing back some of its losses from the past two weeks.

But the ANZ Bank's Chief Economist, Saul Eslake, says there are a number of worrying signs for the US economy.

SAUL ESLAKE: There have been some signs in recent weeks of a softening in the rate of growth in the US economy, towards the end of the first quarter.

There's no doubt that inflation is rising from a very low base and we saw some Consumer Price Index numbers for the US, ah for March on Wednesday night that underscored concerns on that front.

And there's little doubt in my view, nor it would seem in the Federal Reserve's own view, that American interest rates have some considerable way to go on the upside.

NEAL WOOLRICH: Alan Greenspan also told a Senate Budget Committee last night, that the US economy may be headed for more trouble in 2008, when the first wave of the baby boomer generation starts to retire.

ALAN GREENSPAN: The combination of an ageing population and the swell in costs of its medical care is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate.

NEAL WOOLRICH: That's a concern shared in most developed countries, including Australia.

But the ANZ's Saul Eslake says in many ways the US faces a bigger problem than Australia does.

SAUL ESLAKE: Firstly, of course, because they're starting from a position where their public debt is around 50 per cent of GDP and their budget's in significant deficit, whereas ours is in surplus and our public debt is virtually zero.

Secondly, because the US, unlike Australia, has an un-means tested pension scheme, which has to be funded out of current taxes, whereas we have compulsory superannuation and our public pension scheme is means tested.

But they and Australia face exactly the same problem of inexorably rising healthcare costs, driven both by population ageing and by the endless march of medical technology and healthcare price inflation.

PAUL LOCKYER: ANZ Bank Chief Economist, Saul Eslake.