Alan Greenspan was positive about the economy

The head of the US Federal Reserve has told politicians that if they back plans for big tax cuts then they must chop spending by hundreds of billions of dollars in return.

Alan Greenspan warned that spending needed to be cut by about $400bn (�250bn) over 10 years to counterbalance President Bush's plan to eliminate the double taxation of dividends.

The Fed chairman told the House Financial Services Committee that reducing dividend taxes would bring benefits.

But he said these could be wiped out by significant budget deficits and long-term interest rate rises.

I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year Alan Greenspan, Federal Reserve chairman

"I find much to support in the President's programme provided it is matched by cuts in spending."

He said this was critical with the approaching retirement of the baby boom generation - a phenomenon that will cause social security, the US public pension system, and healthcare insurance spending to soar.

Rebound in growth

Mr Greenspan was positive about the current state of the economy.

"I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that improvement remains uncertain."

His comments seemed to suggest that interest rates would remain unchanged for the time being unless the economy unexpectedly weakened.

The Fed chairman reminded the committee that the consensus view of private economists was that there would be a significant rebound in growth in the second half of this year.

"Certainly a number of elements should be working in that direction."

In his congressional testimony, Mr Greenspan said the recent rebound in stock prices and a fall in oil prices suggested that conditions were becoming more favourable for both businesses and consumers.