WASHINGTON U.S. Treasury Secretary Lawrence Summers urged the incoming bush administration on Sunday to continue the policy of paying down the national debt as the best means of sustaining the unprecedented expansion of the U.S. economy.

"I think it's a proven fact that by showing we can pay down the debt in the long run ... It produces more growth and prosperity," Summers said on Fox News Sunday. "Debt reduction in the long run really acts like a tax cut ... reducing capital costs ... and the burden on consumers," Summers said.

Still, Summers said, "I don't think anyone has any question that there's scope for some tax cuts" within a policy framework that gives precedence to paying down the national debt.

But the treasury secretary argued against tax cuts that were "back-loaded" -- which draw on projected future surpluses to reduce current tax burdens.

"A tax cut that is heavily back-loaded ... is having an adverse effect on long-term interest rates and not putting money into anyone's pockets," Summers said.

He refused to speculate on how large a cut could be justified in the current economic environment, saying only that the magnitude of any cuts "will be shaped by whatever happens in the months that go forward."

But Summers made clear he thought the next administration, which takes office on Jan. 20, would be well-advised to continue to put a large share of the federal budget surplus into reduction of the national debt.

"Debt reduction has shown that it can drive the economy," he argued. "If you look at what happens to real wage growth ... markets ... (and) productivity," there's little question that the Clinton administration's focus on debt reduction was wise, and contributed to the nation's current prosperity, he said.

"Nobody in the late 1980s or early 1990s was saying that the U.S. had the best economic performance" in the developed world, Summers said, in an implied jab at former Republican presidents Ronald Reagan and George Bush.

"But now they are," he continued. "Now, unemployment is in the 4 percent range and that has a lot to do with the basic (debt reduction) strategy. ... and I think it's important not to reverse that strategy."

While his remarks suggested a philosophical split with President-Elect George W. Bush, who has promised to enact a $1.3 trillion tax cut that would draw heavily on projected future surpluses, Summers had nothing but praise for Bush's nominee to replace him at the Treasury Department.

Alcoa chairman and former CEO Paul O'neill, widely expected to be confirmed by the Senate as treasury secretary, is "a person who brings great experience in economic and financial matters" to the job, Summers said. "I think he's a very good man."

In the interview, Summers reiterated his view that the U.S. economy was decelerating from its recent brisk expansion into a period of more moderate growth. "There's certainly been a deceleration in growth and there probably has been a change in the balance of risks" away from inflation toward deflation.

But he said he did not see a downturn in the economy at this time. "Continued moderate growth" was his current outlook and that of most private economists, summers said.

"I think that's the consensus judgment," he said.

(Reuter)