Fed chief warns of possible fiscal crisis from budget deficit

Jan 18 | Updated: Jan 19 2007, 05:49am hrs
Federal Reserve Chairman Ben S Bernanke said the US government may face a fiscal crisis'' in the coming decades should it fail to deal with the rising costs of Social Security, Medicare and Medicaid programs.

If early and meaningful action is not taken, the US economy could be seriously weakened, with future generations bearing much of the cost,'' Bernanke said on Thursday in written testimony prepared for a Senate Budget Committee hearing. The chairman, sticking to his past practice, refrained from endorsing any specific proposal to narrow the budget gap.

Bernanke's appearance comes less than three weeks before president George W Bush presents his proposal to balance the federal budget by 2012.

While official projections may show a stable or narrower budget deficit over the next few years, unfortunately, we are experiencing what seems likely to be the calm before the storm,'' Bernanke said in his first hearing on Capitol Hill since Democrats won control of Congress from the Republicans in November's elections.

Bernanke didn't discuss the current state of US monetary policy or economic conditions in the text of his remarks. On February 1, he will have served a year as Fed chairman.

Under Congressional Budget Office projections, the ratio of federal debt held by the public to gross domestic product may rise from about 37%now to about 100 percent in 2030 and grow exponentially after that,'' Bernanke said.

Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both,'' Bernanke said in the testimony.

Bush, who nominated Bernanke in 2005 to succeed Greenspan as Fed chairman, plans on February 5 to release a $2.9 trillion budget proposal that he said would put the budget on a path to balance in five years. Democrats favour letting many of Bush's tax cuts expire when they terminate in coming years, arguing that more revenue is needed to cover the looming surge in spending tied to the aging population.

On January 5, the House of Representatives approved rules that make it more difficult for lawmakers to cut taxes or increase some government spending, changes that Democrats said would help restore fiscal discipline in Washington.

Bloomberg