Chairman of the Federal Reserve Alan Greenspan has cautioned lawmakers against financing additional cuts in taxation with borrowing.

"We should not be cutting taxes by borrowing," Mr Greenspan said in testimony to the Joint Economic Committee of Congress.

"We do not have the capability of having both productive tax cuts and large expenditure increases, and presume that the deficit doesn't matter," added Greenspan, who went on to warn that continuing to finance additional tax cuts with federal borrowing has the potential to "create very serious backlashes in the system".

Greenspan's comments came in response to a question on whether Congress should seek to extend temporary cuts in dividend and interest tax, passed in 2003, which are due to expire at the end of 2008 under current legislation. However, while the Fed Chief has been a long standing supporter of moves to eliminate the double taxation of investment income, it is perhaps the first time that he has explicitly urged caution on the matter.

"I would say, let's confront the question of the trade-offs - of what the advantages are of keeping or even increasing the reduction of the double taxation on dividends with the context of what other priorities there are," Greenspan told the lawmakers.

His comments are also likely to please moderate conservatives, who are calling for tax cuts to drop down the legislative priority list whilst Congress deals with hurricane-related spending and containing the federal deficit, which was $318.62 billion in the 2005 fiscal year according to Treasury Department figures.