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(Update5)
By Scott Lanman and Craig Torres
Jan. 18 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. government may face a ``fiscal crisis'' in the coming decades should it fail to deal with the rising costs of the Social Security, Medicare and Medicaid programs.
``If early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost,'' Bernanke said today before the Senate Budget Committee hearing.
His comments may help frame a debate leading up to President George W. Bush's Feb. 5 budget, in which he will unveil a plan to balance the budget by 2012. Bernanke, unlike his predecessor Alan Greenspan, refused to endorse a strategy to narrow the shortfall.
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, 53, didn't discuss the current state of U.S. monetary policy or economic conditions in his remarks. He will testify on the economic outlook before Senate and House of Representatives committees on Feb. 14-15.
Under Congressional Budget Office projections, the ratio of federal debt held by the public to gross domestic product may rise from about 37 percent 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 Budget Proposal
Bush, who nominated Bernanke in 2005 to succeed Greenspan as Fed chairman, plans on Feb. 5 to release a $2.9 trillion budget proposal that he said would put the budget on a path to balance in five years.
Treasury Secretary Henry Paulson said on Jan. 4 that ``given the fact that revenues are coming in and revenues are strong, it looks like we're going to be able to balance,'' in an interview with PBS.
Bernanke said the economic growth spurring revenue today won't resolve the budget's long-term challenges.
``Economic growth alone is unlikely to solve the nation's impending fiscal problems,'' Bernanke said. ``Economic growth leads to higher wages and profits and thus increases tax receipts, but higher wages also imply increased Social Security benefits, as those benefits are tied to wages.''
Democrats' Stance
Democrats favor 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 Jan. 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.
The White House Office of Management and Budget projected in July that the budget deficit would be $339 billion this fiscal year, up from $248 billion last year. The OMB estimated that the deficit would narrow to $188 billion in 2008. Bush entered office in 2001 with a budget surplus of $127 billion.
Bernanke cautioned that supporters of low taxes must ensure that spending is ``kept low as well,'' while backers of ``more- generous benefits payments'' must recognize that higher taxes may have ``adverse'' consequences for the economy.
Tax Rates
``Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve and appropriate balance of spending and revenues in the long run,'' Bernanke said. He added that the ``general'' view is that tax cuts ``don't pay for themselves.''
Bernanke also said that increased government saving would help narrow the record U.S. current-account deficit, the broadest measure of trade.
What would help Congress, Bernanke said, is to monitor government spending relative to GDP ``or a similar indicator.'' In addition, Congress should pay ``close attention to measures of the long-term solvency of entitlement programs, such as long- horizon present values of unfunded liabilities for Social Security and Medicare,'' Bernanke said.
Bernanke previously used an Oct. 4 speech to warn of the ``major impact'' that the aging U.S. population will have on the federal budget.
Without changes to current law, combined spending on Social Security and Medicare will rise from 7 percent of U.S. gross domestic product today to almost 13 percent by 2030, Bernanke said.
Such increases will force the country to choose from policy changes including higher taxes, spending cuts, a bigger budget deficit, ``or some combination thereof,'' Bernanke told the Washington Economic Club in October.
Yellen on Budget
Other Fed policy makers share Bernanke's stance that the government must deal with the situation in some way. Yesterday, San Francisco Fed President Janet Yellen, who like Bernanke has served as chairman of the White House Council of Economic Advisers, said the longer-term budget picture ``frightens me.''
``We'll be looking at budget deficits that will make us wish for the level that we have now,'' Yellen said in response to an audience question yesterday after a speech in Arizona. ``Some changes will need to be made on the spending side, the entitlement programs, or taxes, or both.''
The Senate budget panel last heard testimony from a Fed chairman in April 2005, when Greenspan said record fiscal deficits threatened the U.S. economy, and urged lawmakers to cut spending and work toward a balanced budget.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .
Last Updated: January 18, 2007 11:20 EST
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