Business | Economy
Bernanke sounds warning on growing US budget deficit
Fed chairman says higher taxes and social security changes likely
- Washington Post
- Published: 00:00 April 9, 2010
- Image Credit: Reuters
- While the immediate audience for the speech was the Dallas Regional Chamber, Bernanke’s message was intended for Congress and the Obama administration.
Washington: Federal Reserve Chairman Ben Bernanke warned late on Wednesday that Americans may have to accept higher taxes or changes in cherished entitlements like Medicare and Social Security if the nation is to avoid staggering budget deficits that threaten to choke off future economic growth.
"These choices are difficult, and it always seems easier to put them off — until the day they cannot be put off any more," Bernanke said in a speech. "But unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth."
His stern lecture came even as the economy is emerging from the worst recession in years, sending the stock market up considerably over the past year and raising public hopes for a return to prosperity. But the economic downturn has driven already large budget deficits to their highest level relative to the economy since the end of the Second World War. This has fuelled public concern over how long the US can sustain its fiscal policies.
Debate
The health care bill signed by President Obama last month has further stoked the national debate over government entitlement programmes, though the non-partisan Congressional Budget Office has projected the legislation would actually reduce future deficits.
While the immediate audience for the speech was the Dallas Regional Chamber, Bernanke's message was intended for Congress and the Obama administration. Officials in both branches have spoken of the need for a more sustainable fiscal policy, but few have proposed concrete plans to achieve it. A deficit commission created by Obama is scheduled to begin meeting at the end of the month.
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Bernanke did not endorse any particular approach to reducing the deficit. But he laid out the "difficult choices."
"To avoid large and ultimately unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programmes such as Social Security and Medicare, less spending on everything else from education to defence, or some combination of the above," he said.
His remarks highlighted the difficulties posed by funding these entitlement programmes over the long term. With the population ageing and medical costs rising faster than inflation, Medicare is set to become a major drain on the federal budget in the coming decades, though the recently passed health-care bill has delayed the date when the program will begin to require big infusions of cash.
Social Security is already draining resources from the broader federal budget, as spending on benefits has risen above this year's Social Security tax collections. While that gap is expected to be fleeting, the program, the largest single item in the federal budget, is projected to require sustained support within the next 10 years.
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