WASHINGTON — Federal Reserve Chairman Ben Bernanke Tuesday urged Congress to replace the set of harsh, automatic budget cuts that will take effect on March 1, arguing that this "additional near term burden" is the last thing that the ongoing economic recovery needs.
In his prepared semiannual testimony on the economy and monetary policy to the Senate Banking Committee, Bernanke stressed to lawmakers that even with the aggressive actions taken by the central bank to boost growth, the U.S. economy's performance over the near term and in the longer run "will depend importantly" on the course of fiscal policy.
Bernanke noted that a majority of the recent measures to trim the country's massive budget deficits have focused on near-term spending cuts, "which, taken together, could create a significant headwind for the economic recovery."
He noted that the across-the-board spending cuts set to kick-in Friday - $85 billion this year alone, $1.2 trillion over a decade - are estimated by the Congressional Budget Office to contribute about a 0.6 percentage point to the fiscal drag on GDP growth this year.
"Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant," Bernanke warned the Senate panel.
He added that the budget-cutting effect of sequestration will be limited as well. "Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions," Bernanke said.
Bernanke urged Congress and the administration to replace the front-loaded spending cuts with policies that would lower the deficit "more gradually" in the near term "but more substantially" further out.
"Such as approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget," he counseled.
Looking ahead, as U.S. fiscal authorities work to place the federal budget on a sustainable long-run path, the Fed chief cautioned that "not all tax and spending programs are created equal with respect to their effects on the economy."
In order to get the country's finances on a sound footing, Bernanke urged lawmakers to focus on policies that increase incentives to work and save, encourage workers to broaden their skills, and provide "necessary and
productive" public infrastructure.
"Although economic growth alone cannot eliminate federal budget imbalances, in either the short or longer term, a more rapidly expanding economic pie will ease the difficult choices we face," Bernanke concluded.
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