Greenspan in tax cut U-turn

Alan Greenspan, the world's most powerful central banker, signalled a fundamental shift in his thinking yesterday by dropping his opposition to US tax cuts. He kept the markets guessing about the next move in interest rates.

In his first speech to be made since President Bush took office, the Federal Reserve chairman said on Capitol Hill that tax cuts - a central plank of the new administration's economic policy - would be a good defence against a worsening slowdown in US growth.

"Should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good," he said.

Monetary policy would remain the frontline weapon for steering the US economy off the rocks of recession. "Fiscal policy is too blunt a tool to work as an anti-cyclical device," he told a senate budget committee that included newly elected Hillary Clinton.

The Fed, which made a half-point emergency rate cut earlier this month, meets next week and is widely expected to reduce the cost of borrowing again to boost growth, which Mr Greenspan said was now virtually zero. He offered no clues about the size or timing of the next move.

Analysts said the refusal to give the markets any direction suggested there was internal debate about making a quarter- or a half-point cut.

Mr Greenspan previously opposed using the budget surplus for tax cuts but said he was now optimistic that its projected size - $800bn (£548bn) in 10 years' time - gave scope for fiscal relaxation.

He cautioned against "imprudent fiscal policies" and said there was a "considerable danger of overdoing it". Policymakers and economists took this to mean he would support phased tax cuts, rather than the sweeping proposals of the Bush administration.

The US slowdown and its global consequences were the main talking point at the start of the annual meeting of businessmen and policymakers in the Swiss ski resort of Davos.

In a panel discussion, Jakob Frenkel, group chairman at Merrill Lynch, played down prospects of a global downturn. "We are not talking about global recession but a slowdown in non-sustainable growth," he said.

Alan Blinder, of Princeton university, insisted Europe would not be immune from the US slowdown.

Panelists were scathing about Japanese economic policy and predicted that Tokyo would not come to grips with debt problems for at least two years. "The only way to be optimistic about Japan is if you look at the chart upside down," said Kenneth Courtis, the vice-chairman of Goldman Sachs in Asia.

• Britain ran up a record £2.8bn trade deficit with countries outside the European Union in December, mainly due to a 10% drop in exports to north America. The global deficit narrowed to £2.1bn in November from October's £2.5bn due to a growing surplus with the EU.