Deficit-strapped US faces 'difficult' tax choices: Bernanke

April 8, 2010

AFP

Andrew Beatty

WASHINGTON (AFP) – Facing unsustainable budget deficits, the United States will have to make difficult choices between higher taxes and social spending, Federal Reserve chairman Ben Bernanke said on Wednesday.

Wading into a fiercely contested political debate, Bernanke said trimming the deficit was made more urgent by the rapidly aging US population.

"Inevitably, addressing the fiscal challenges posed by an aging population will require a willingness to make difficult choices," he said according to remarks prepared for delivery in Dallas, Texas.

"To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above."

Tackling the massive US budget deficits and ballooning debt has become a hot-button political issue in Washington, as former president George W. Bush and President Barack Obama have spent billions of taxpayers' money to stave off economic collapse.

While both Republicans and Democrats have advocated deficit reduction, they disagree about how and when it should be done.

Bernanke said taking quick steps to balance the books would hurt the fragile recovery, but a credible longer-term plan could spark economic growth today.

"A sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable," he said adding that a "a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term."

Speaking to the Dallas Regional Chamber, a business group, he said the US economy was improving but "far from being out of the woods."

Despite this, he urged political leaders not to take the seemingly "easier" option of delaying action on the deficit.

"Unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth," he said.

The US government registered a record budget deficit in February of 220.909 billion dollars despite rising revenues, setting a record 17th consecutive month in the red.

Spending surged notably because of tax credits to individuals and businesses, part of a three-year budget stimulus plan launched in February 2009.

The White House has warned that the deficit for the 2010 fiscal year that ends September 30 could swell to 1.555 trillion dollars, eclipsing the prior year's record of 1.415 trillion dollars, because of government spending to stimulate recovery from the worst recession in decades.

Obama has vowed to reduce the deficit, beginning the following year, and has lauded his health care bill as a major step forward.

The non-partisan Congressional Budget Office has estimated the bill could cut 130 billion dollars from the bloated US deficit through 2019 and 1.2 trillion in the second 10 years.

The US debt stood at 7.5 trillion dollars or 53 percent of gross domestic product at the end of 2009, according to the CBO, which expects that figure to balloon to 20.3 trillion dollars, or 90 percent of GDP by 2020.

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