NEW YORK – The federal budget deficit needs to be slashed, Federal Reserve Board Chairman Ben S. Bernanke said Tuesday.
The deficit is now about 9% of gross domestic product, Bernanke said at the annual conference of the Committee for a Responsible Federal Budget, according to prepared text of his remarks, which was released by the Fed. While projections are for the deficit to fall to 5% of GDP in fiscal 2015, assuming current budget policy and the economy improves with employment close to full, longer-term projections “that extrapolate current policies and make plausible assumptions about the future evolution of the economy show the structural budget gap increasing significantly further over time.”
One Congressional Budget Office projection see the deficit at 6.5% of GDP in 2020 and almost 13% of GDP in 2030. “The ratio of outstanding federal debt to GDP, expected to be about 69 percent at the end of this fiscal year, would under that scenario rise to 87 percent in 2020 and 146 percent in 2030. One reason the debt is projected to increase so quickly is that the larger the debt outstanding, the greater the budgetary cost of making the required interest payments,” he said. “This dynamic is clearly unsustainable.”
While there have been warnings that an aging population would mean federal entitlements would grow, little was done and now the projections are becoming reality.
The consequences of high debt levels include: “rising federal debt crowds out private capital formation and thus reduces productivity growth. To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt. High levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events,” he said.
Even the specter of unsustainable deficits can cause lost confidence that leads to a fiscal crisis.
“Maintaining the status quo is not an option,” Bernanke stressed.
He urged the government to use federal budget policy to achieve fiscal sustainability, a situation in which the ratio of federal debt to national income is stable or moving down over the longer term. This goal can be attained by bringing spending, excluding interest payments, roughly in line with revenues, or in other words, by approximately balancing the primary budget.”
