WASHINGTON - Federal Reserve Board Chairman Alan Greenspan urged Congress to adjust the tax code to favor savings and discourage consumption.
"If there is support for that, then I would encourage it," Mr. Greenspan said during wide-ranging testimony before the Senate Budget Committee.
Mr. Greenspan said the savings policy, combined with significant deficit reduction, would ensure continued economic strength in the long run.
On the deficit front, the central banker said Congress can lower long- term interest rates by seriously cutting spending. The cuts would reassure bond purchasers, who force the government to offer higher rates to guard against inflation.
Mr. Greenspan said he supports a balanced budget amendment and the so- called super-majority provision, which would require 60% of each chamber to vote for any tax increases.
Congress also shouldn't spell out how it will eliminate the deficit before it passes the amendment, he said.
"You don't know the optimum path until you get to the different forks in the road," Mr. Greenspan said.
He also rejected suggestions that Congress should raise taxes to reduce the deficit.
"That might turn out to be counterproductive," Mr. Greenspan said, noting that higher taxes could slow the economy.
At the same time, Mr. Greenspan said Congress should not cut taxes until it tackles the deficit. Even then, Congress should wait until a downturn in the economy before passing any tax cut that would spur economic activity.
Mr. Greenspan, reiterating almost verbatim comments he made Wednesday before a different Senate committee, signaled that the central bank will raise interest rates when the Federal Open Market Committee meets next week. He said factories are near capacity, unemployment is near a record low, and supply shortages are beginning to appear.
Most analysts expect the hike, which would be the seventh in 12 months, to range from 50 to 75 basis points.
Mr. Greenspan also said that the "torrid" and "unsustainable" growth of 1994 appears to be coming to an end.
"These are good signs, not bad signs," he said, adding that the country couldn't support such rapid growth without incurring serious inflation.
Three economists, who testified immediately following Mr. Greenspan, supported many of his comments.
Mickey D. Levy, an economist with NationsBanc Capital Markets Inc., said Congress cannot blindly reduce taxes.