Bernanke tells Congress it needs long-term plan to lower record deficits

While deficits are unavoidable in the near future, the
nation’s fiscal path is unsustainable and the federal budget could face
debt-to-gross-domestic-product ratios of more than 100 percent within the next
10 years, Bernanke warned the Joint Economic Committee.

“A credible plan for fiscal sustainability could yield
substantial near-term benefits in terms of lower long-term interest rates and
increased consumer and business confidence,” Bernanke told the committee. “Addressing
the country’s fiscal problems will require difficult choices, but postponing
them will only make them more difficult.”

Bernanke has stepped up his warnings about the budget
deficit, including last week when he gave a speech stating that entitlement
reforms, spending cuts and tax increases needed to be considered by the
government because of the growing deficit.

{mosads}“Although sizable deficits are unavoidable in the near term,
maintaining the confidence of the public and financial markets requires that
policymakers move decisively to set the federal budget on a trajectory toward
sustainable fiscal balance,” he said on Wednesday. 

The worst recession in decades has drastically impacted the
nation’s finances.

The Obama administration and the nonpartisan Congressional
Budget Office have estimated that this year’s deficit could reach $1.6 trillion.
Future annual deficits are expected to recede slightly, but are still expected
to remain at about 4 to 5 percent of GDP through 2020. 

Higher deficits will lead to a greater amount of debt held
by the public, Bernanke said. He estimated public debt would eclipse 70 percent
of the country’s gross domestic product by the end of fiscal 2012.

He said the deficit could rise as high as 9 percent of GDP
by 2020 and that federal debt could rise to more than 100 percent of GDP. 

“It’s fair to say that 4 to 9 percent is not sustainable and
it’s very important to consider how that will change looking forward,” he said.

Although Bernanke doesn’t expect any major changes to affect
the deficit and debt this year, he said fiscal policy will need to change over
the medium term to lower deficits. 

Bernanke noted signs of an economic recovery, including data
released Wednesday that showed an increase in retail sales, and relatively flat
inflation. But he voiced concern about the amount of time needed to restore
more than 8.5 million jobs lost in the past two years and noted that 44 percent
of those unemployed in March had been without a job for six months or more.

“Long periods without work erode individuals’ skills and hurt
future employment prospects,” he said. “Younger workers may be particularly
adversely affected if a weak labor market prevents them from finding a first
job or from gaining important work experience.”