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Tuesday, April 27, 2010

Fiscal Day of Reckoning

Addressing the National Commission on Fiscal Responsibility and Reform, Federal Reserve Chairman Ben Bernanke stated that “in the absence of further policy actions, the federal budget appears set to remain on an unsustainable path.”

Bernanke warns that even after the economy returns to normal, forecasts show that our structural deficit is large relative to the size of U.S. economy and will only get larger over time. Rising health-care cost and the aging of the U.S. population are exerting upward cost pressure on entitlement programs – Medicare, Medicaid, and Social Security. As a result, this will fuel an expansion in the size of future federal deficits.

Moreover, as debt and deficits grow, so will our interest payments. Given our reliance on foreign savings to finance the Federal debt, this means more of our future income is going to interest payments on debt held abroad.

He said the costs of failing to achieve long-term fiscal sustainability will assuredly lead to higher interest rates. This will retard capital formation and inhibit productivity growth. The net result will be a lowering of the standard of living for average Americans.

As a country, we are going to have to make difficult choices about entitlement programs, other federal spending priorities, and taxes. Chairman Bernanke stated: “Our nation should soon put in place a credible plan for reducing deficits to sustainable levels over time. Doing so earlier rather than later will not only help maintain the U.S. government's credibility in financial markets, thereby holding down interest costs, but it will also ultimately prove less disruptive by avoiding abrupt shifts in policy and by giving those affected by budget changes more time to adapt.”

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