NEW YORK – The federal budget appears to be on an “unsustainable path” while the U.S. fiscal status “has deteriorated appreciably since the onset of the recession and the financial crisis,” Federal Reserve Board Chairman Ben S. Bernanke said today.
The weak economy has pushed the deficit higher, and with recovery, the “deficit should narrow over the next few years,” Bernanke told the National Commission on Fiscal Responsibility and Reform, according to prepared text of his remarks, which were released by the Fed.
“However, 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 warned. Projections “show a structural budget gap that is both large relative to the size of the economy and increasing over time.”
Growth, he said, is not the answer. “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.”
Caring for an aging society has put “upward pressure on the deficit,” not only in terms of health care costs, but Social Security, as well. “The projected fiscal imbalances associated with the Social Security system are notably smaller than those for federal health programs, but they still are significant and thus present an important challenge for policy.”
He said the panel should try to “put us on a path to fiscal sustainability” by “bringing spending, excluding interest payments, roughly into line with revenues. Unfortunately, most projections suggest that we are far from this goal, and that without significant changes to current policy, the ratio of federal debt to national income will continue to rise sharply. Thus, the reality is that the Congress, the Administration, and the American people will have to choose among making modifications to entitlement programs such as Medicare and Social Security, restraining federal spending on everything else, accepting higher taxes, or some combination thereof.”
He added, “Achieving long-term fiscal sustainability will be difficult, but 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.”
