Greenspan hails tax cuts

Federal reserve chairman Greenspan backs President Bush's planned tax cuts.

The US government should use its budget surplus to slash the American people's tax burden rather than spend more money, the Federal Reserve chairman Alan Greenspan has said on Friday.

Traders no longer expect an immediate cut in US interest rates.

"If long-term fiscal stability is the criterion, it is far better that the surpluses be lowered by tax reductions than by spending increases," the boss of the US central bank said in a statement to the House of Representatives.

The US government's treasury is currently boasting a large surplus, and Mr Greenspan acknowledged that the flow of money would be healthy for some time to come.

Submitting his budget to Congress earlier this week, President George W Bush had said the American people had been overcharged in the past, and that he would give them a refund.

But in his comments, Mr Greenspan balanced his endorsement of President Bush's tax cut plans by warning against an erosion of fiscal discipline.

Productivity will be stable

Mr Greenspan did forecast that although US productivity might fall in the short-term, it should stabilise and stay above past levels in the long-term.

When the US economy sneezes, the world economy catches a cold.

Productivity growth in the United States has been very fast during the past five years, much faster than during the previous two decades.

But according to Mr Greenspan, it fell back during the last six months of 2000, and he predicted that the decline in productivity growth to continue until Easter.

Stock markets fall

The stock markets slipped when they opened on Friday because traders interpreted Mr Greenspan's remarks as yet another indication that a cut in interest rates is not imminent.

Before Mr Greenspan's two speeches this week, many investors had convinced themselves that the Federal Reserve would cut interest rates very soon.

Now there are few hopes for a rate cut before the Fed's next meeting on 20 March.