WASHINGTON, Sept 12: US Federal Reserve chairman Alan Greenspan warned US lawmakers on Thursday to regain their grip on the rapidly deteriorating US budget or risk the economic future.

“Restoring fiscal discipline must be a high priority,” the powerful 76-year-old Federal Reserve chief told the House of Representatives budget committee.

“Returning to a fiscal climate of continuous large deficits would risk returning to an era of high interest rates, low levels of investment and slower growth of productivity,” Greenspan said.

The US budget is forecast to hit a deficit of $157 billion this fiscal year to September 30 and a deficit of $145 billion the following year.

A surplus is not forecast until fiscal 2006.

The Congressional Budget Office projections, based on current spending and tax policies, represent a stunning deterioration from last year’s budget surplus of $127 billion.

In the past year, the US economy had weathered sliding share markets, a sharp retrenchment in investment spending and the September 11 terrorist attacks, Greenspan said.

“To date, the economy appears to have withstood the set of blows well, although the depressing effects still linger and continue to influence, in particular, the federal budget outlook,” he said.

Interest rates were low now and the budget situation was better than it had been a decade ago, Greenspan said.

“But history suggests that an abandonment of fiscal discipline will eventually push up interest rates, crowd out capital spending, lower productivity growth and force harder choices upon us in the future.”

The economic downturn pushed up government spending while slicing revenues, Greenspan said. Plunging share prices further eroded government income.

“The recent surge in discretionary spending, necessitated only in part by the war on terrorism and the need for enhanced homeland security, has also made the budget picture less sanguine.”

Greenspan called on lawmakers to adopt a stricter accounting system for the budget — the so-called accrual system.

Under the accrual system, the government’s books would have to show the cost of future retirement benefits as they are earned by workers, not just the amount of benefits being paid out now.

The accrual system of accounting is the norm in the private sector, Greenspan noted. It would reflect the trillions of dollars of liabilities in retirement and medical benefits.—AFP