By Simon Miller
The United States will still face a large structural gap if the government continues its current policies, the head of the Federal Reserve warned today.
Ben Bernanke, chairman of the Fed, told the Committee on the Budget at the House of Representatives that the federal budget deficit was averaging around 9% over the last three years but was expected to narrow as the economy continues to expand and stimulus policies are phased out.
However, he continued: “Unfortunately, even after economic conditions have returned to normal, the nation will still face a sizable structural budget gap if current budget policies continue.”
Bernanke said that projections suggested that the budget deficit would be more than 4% of GDP in fiscal year 2017, assuming that the economy is close to full employment.
“Of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy and budget under current polices, show the structural budget gap increasing significantly further voer time and the ratio of outstanding federal debt to GDP rising rapidly. This dynamic is clearly unsustainable,” he added.
He warned that high levels of debt would crowd out private capital formation and impair the ability of policymakers to respond effectively to future economic shocks and other adverse events.
Bernanke continued: “Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy.
“Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.”
He added: “To achieve economic and financial stability, US fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. Attaining this goal should be a top priority.”