Bernanke says prompt action needed on deficit

By Pedro Nicolaci da Costa

WASHINGTON (BestGrowthStock) – Federal Reserve Chairman Ben Bernanke said on Tuesday the country’s budget deficit is on an unsustainable path and requires near-term action from policymakers to avoid dangerous outcomes.

Though he offered no concrete proposals for fiscal reform, Bernanke flagged the rising cost of healthcare and social security programs as key hurdles in refreshing his warnings on the United States’ growing debt burden.

“In the absence of further policy actions, the federal budget appears set to remain on an unsustainable path,” Bernanke told the 18-member National Commission on Fiscal Responsibility and Reform.

Bernanke said the nation’s heavy debt load risked putting upward pressure on interest rates.

“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,” Bernanke said.

His remarks come as investors around the world fret over a worsening debt crisis in Greece, which forced the country last week to ask for financial aid from fellow European Union nations and the International Monetary Fund.

Not all economists agree the U.S. deficit is too large given the size of the economy and given the need for continued stimulus in the wake of the worst recession since the Great Depression.

“As long as private demand for new borrowing and spending is weak, then increased public borrowing will not cause sustained upward pressure on interest rates,” argued Josh Bivens, economist at the liberal Economic Policy Institute, in a report released on Monday.

President Barack Obama has given the independent panel leeway to suggest remedies for the debt and deficits. The panel has until December 1, after the November U.S. congressional elections, to report on its recommendations.

Bernanke said the U.S. economy could not grow its way out of the problem.

“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,” Bernanke said.

The U.S. deficit was $1.4 trillion in 2009, nearly 10 percent of the size of the overall economy. It is expected to be that much again this year.

Bernanke indicated changes in taxation could play a role in reform.

“I suspect that it is too much to ask the commission to review the tax code in detail, but a full picture of our budgetary dilemma will require attention to the strengths and weaknesses of our current system of raising revenue,” Bernanke said.

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Bernanke says prompt action needed on deficit