By Steven K. Beckner
(MNI) – Federal Reserve Chairman Ben Bernanke issued strong
warnings Tuesday on the need to reduce the federal budget deficit in a
speech to President Obama’s National Commission on Fiscal Responsibility
and Reform.
Bernanke, speaking ahead of a two-day meeting of the Fed’s
policymaking Federal Open Market Committee, told the Commission there
will be “great damage” to the economy if the federal government does not
get its finances on a “sustainable long-run trajectory.”
The Fed chief said the U.S. fiscal position has “deteriorated
appreciably” and will “remain on an unsustainable path” even after
economic and financial conditions have returned to normal without action
to reform Social Security and other entitlement programs.
Unless Congress and the White House act to slash deficits in coming
years, a mounting national debt will push up interest rates, making the
debt even costlier to finance, and could endanger investor confidence
and the economic recovery, he said.
Uncontrolled growth in the debt will also restrict policymakers’
ability to respond to future crises, Bernanke warned.
While increased spending must be met by rising revenues Bernanke
cautioned against “excessive” taxes.
Bernanke singled out rising health care costs as one source of
deficit spending that needs to be curbed, but cast doubt on whether the
recently passed health care legislation will accomplish that.
They were Bernanke’s hardest-hitting words to date on the threat
posed by record budget deficits and the accompanying increase in the
size of the national debt relative to gross domestic product.
But since Congress and the White House themselves have failed to
control the deficit over the past decade, his remarks were directed at a
bipartisan commission — co-chaired by former Sen. Alan Simpson,
R-Wyoming, and Erskine Bowles, White House chief of staff under
President Clinton — which was holding its first meeting.
“History makes clear that failure to achieve fiscal sustainability
will, over time, sap the nation’s economic vitality, reduce our living
standards, and greatly increase the risk of economic and financial
instability,” Bernanke said.
“Our nation’s fiscal position has deteriorated appreciably since
the onset of the recession and the financial crisis,” he said, adding
that the widening of the deficit to a record $1.6 trillion is only
partially due to the financial crisis and recession.
Bernanke said that “as the economy and financial markets continue
to recover, and as the actions taken to provide economic stimulus and
promote financial stability are phased out, the budget deficit should
narrow over the next few years.”
“However,” he added, “even after economic and financial conditions
have returned to normal, in the absence of further policy actions, the
federal budget appears set to remain on an unsustainable path.”
He cited projections that “show a structural budget gap that is
both large relative to the size of the economy and increasing over
time.”
Bernanke suggested that the deficits will fuel their own growth
through rising financing costs: “as debt and deficits grow, so will the
associated interest payments, an obligation that in turn further
increases projected deficits.”
And Bernanke said “we cannot grow our way out of this problem. No
credible forecast suggests that future rates of growth of the U.S.
economy will be sufficient to close these deficits without significant
changes to our fiscal policies.”
Bernanke said “rapidly rising health-care costs and the aging of
the U.S. population” are among the “primary forces” putting upward
pressure on the deficit and need to be brought under control.
“At this point, the effects of the recent legislation on federal
health-care spending over the long term are uncertain, in part because
they depend importantly on implementation,” he said. “But we do know
that continued increases in health-care costs at the rate seen in recent
decades, together with the aging of the population, would put enormous
pressures on the federal budget in coming years.”
Strains on the Social Security program due to a declining ratio of
workers paying into the system relative to beneficiaries constitute
another fiscal quagmire, he indicated.
“The commission will have the difficult job of weighing the
economic, social, and other benefits of these programs and comparing the
implications of cuts in these areas against other means of closing the
fiscal gap,” he said.
Bernanke said the commission also needs to deal with the question
of revenue.
“For fiscal sustainability, whatever level of spending is chosen,
revenues must be sufficient to sustain that spending in the long run,”
he said, but “at the same time, economic vitality is enhanced when taxes
are not excessive and are collected through a system that is
economically efficient, equitable, and transparent.”
“At present, a broad consensus exists that the U.S. tax code does
not satisfy these criteria and is in need of reform,” he added.
Bernanke said the commission’s ultimate goal “should be to put us
on a path to fiscal sustainability,” which he defined as keeping the
ratio of federal debt held by the public to national income “at least
stable (or perhaps even decline) in the longer term.”
“This goal can be achieved by bringing spending, excluding interest
payments, roughly into line with revenues,” he said.
But currently, the U.S. is “far from this goal,” he said, adding
that “without significant changes to current policy, the ratio of
federal debt to national income will continue to rise sharply.”
Bernanke acknowledged that achieving getting the federal government
back on a sustainable fiscal path will be “daunting,” but said “the
costs of failing to do so could be very high.”
“Increasing levels of government debt relative to the size of the
economy can lead to higher interest rates, which inhibit capital
formation and productivity growth — and might even put the current
economic recovery at risk,” he said.
“To the extent that higher debt increases our reliance on foreign
borrowing, an ever-larger share of our future income would be devoted to
interest payments on federal debt held abroad.”
“Moreover, other things being equal, increased federal debt implies
higher taxes in the future to cover the associated interest costs —
higher taxes that may create disincentives to work, save, hire, and
invest,” Bernanke continued.
“High levels of debt also decrease the ability of policymakers to
respond to future economic and financial shocks; indeed, a loss of
investor confidence in the ability of a government to achieve fiscal
sustainability can itself be a source of significant economic and
financial instability.”
Bernanke said he could not pinpoint “the threshold at which
government debt begins to endanger prosperity and economic stability,”
but said “given the significant costs and risks associated with a
rapidly rising federal debt, our nation should soon put in place a
credible plan for reducing deficits to sustainable levels over time.”
He warned that postponing difficult choices and failing to put the
nations finances on a sustainable long-run trajectory “would ultimately
do great damage to our economy.”
** Market News International Washington Bureau: 202-371-2121 **
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