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Bernanke: Cut Deficit Or Do 'Great Damage' To Economy

JEANNINE AVERSA   04/27/10 11:03 AM ET   AP

Bernanke

WASHINGTON — Failing to curb federal budget deficits would do "great damage" to the U.S. economy in the long run, Federal Reserve Chairman Ben Bernanke warned Tuesday.

Bernanke again urged the White House and Congress to come up with a credible plan to reduce the nation's red ink, which hit a record $1.4 trillion last year.

Failing to do so would push interest rates higher – not only for Americans buying cars, homes and other things – but also for Uncle Sam to service its debt payments, he said.

All that would sap national economic activity and could cause employers to cut back on hiring, Bernanke said.

The Fed chief made his most urgent call yet to get the nation's fiscal house in order. His plea came in prepared remarks to the first meeting of President Barack Obama's commission to tackle the soaring deficit.

"The path forward contains many difficult trade-offs and choices, but postponing those choices and failing to put the nation's finances on a sustainable long-run trajectory would ultimately do great damage to our economy," Bernanke said.

The nation's budget deficit swelled to a record high last year as the recession took a big bite out of tax revenues, while spending rose to stimulate the economy and provide relief to struggling Americans.

Obama wants the panel to come up with a plan to cut the deficit so that it is no bigger than $550 billion by 2015, an amount equal to about 3 percent of the total U.S. economy. That would require deficit savings in the range of $250 billion or more.

The options for slicing the deficit – cutting spending on popular entitlement programs like Social Security and Medicare and raising taxes – will be difficult for the White House and Congress to sell to the American public.

Bernanke also warned that policymakers shouldn't think that growing the economy – and thus tax revenues – will remedy the situation. "Unfortunately, we cannot grow our way out of this problem," Bernanke said. "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."

Rapidly rising health-care costs and the aging of the U.S. population are among the forces putting pressure on the deficits in the years ahead, Bernanke said.

At this point, Bernanke said the impact of the recently enacted health care legislation on federal health-care spending over the long run is uncertain. However, what is clear is that continued increases in health-care costs at the rate seen in recent decades – along with a graying population – would put "enormous pressures" on the federal budget in the coming years. Controlling health-care costs is a critical part of the deficit-reduction equation, he said.

Bernanke said the federal budget currently appears set to stay on an "unsustainable path." Hard choices must be made by policymakers sooner, rather than later, to fix this, the Fed chief said.

"No laws are more basic than the laws of arithmetic. For fiscal sustainability, whatever level of spending is chosen, revenues must be sufficient to sustain that spending in the long run," Bernanke said.

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Filed by Alex Leo  |