Growth in the United States economy has slowed down dramatically and "is close to zero", the US Federal Reserve chairman, Mr Alan Greenspan, told the US Congress yesterday, in a gloomy assessment of the short-term economic outlook. However, Mr Greenspan, not known for exuberant long-term predictions, astonished observers and delighted Republicans by stating that the US surplus was growing so fast and getting so big that tax cuts were now a good idea. President Bush has made a $1.6 trillion tax cut over 10 years a cornerstone of his economic policy, and plans to send an early tax-cutting proposal to Capitol Hill.
Mr Greenspan's long-awaited comments on the economy came in testimony before the Senate Budget Committee. They revealed that the slowdown is more serious than previously thought. Many analysts had predicted that growth was still running at 1 or 2 per cent.
"As far as we can judge, we have had a very dramatic slowing down. We are probably very close to zero at this particular moment," he said.
The negative assessment of growth by the most influential US banker echoed those of speakers at the annual World Economic Forum at Davos in Switzerland, where most played down fears of a worldwide recession but predicted dramatic slowdowns in the US and Japan.
While endorsing tax cuts, Mr Greenspan warned that they should not be used "to get in front of worsening forces which could eventually lead to a recession". He said that in the past, it had not been possible to enact emergency tax cuts before a recession had ended.
The most extraordinary aspect of Mr Greenspan's testimony, however, was his reversal of a long-held stance that the best use of growing federal surpluses was to pay off the national debt. He told senators that forecasts of massive surpluses now allowed for substantial debt reduction and tax cuts.
The most recent projections made clear that "the highly desirable goal of paying off the federal debt is in reach before the end of the decade", he said. The new budget surplus projections had "reshaped the choices and opportunities before us".
The time had come for managing a "glide path to zero federal debt" and, if there was longterm fiscal stability, "it is far better . . . that the surpluses be lowered by tax reductions than by spending increases." Mr Greenspan's testimony makes for a good start in the relationship between the Federal Reserve and the White House, which throughout the Clinton era was key to unprecedented growth in the economy.