The following are excerpts from the opening testimony Tuesday before the president’s Commission on Fiscal Responsibility and Reform:
Federal Reserve Board Chairman Ben S. Bernanke:
The task of developing and implementing sustainable fiscal policies is daunting, but meeting this challenge is absolutely essential. History makes clear that failure to achieve fiscal sustainability will, over time, sap the nation's economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.
Our nation's fiscal position has deteriorated appreciably since the onset of the recession and the financial crisis. The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the costs of policy actions taken to ease the recession and steady financial markets.
As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and provide financial stability are phased out, the budget deficit should narrow over the next few years. However, even after economic and financial conditions have returned to normal, in the absence of further policy actions, the federal budget appears set to remain on an unsustainable path.
A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time. Moreover, as debt and deficits grow, so will the associated interest payments, an obligation that in turn further increases projected deficits.
Unfortunately, we cannot grow our way out of this problem. No credible forecast suggests that future rates of growth of the U.S. economy will be sufficient to close these deficits without significant changes to our fiscal policies.
Among the primary forces putting upward pressure on the deficit are rapidly rising health care costs and the aging of the U.S. population. Federal spending for Medicare and Medicaid has increased substantially as a share of our national income over the past several decades, spurred both by the rising number of beneficiaries in these programs and by ongoing increases in spending per beneficiary.
Under policies in place prior to the recent enactment of the health care bill, budget projections show that spending for Medicare and Medicaid would roughly double as a share of national income over the next two decades and would continue to rise significantly further in subsequent years.
At this point, the effects of the recent legislation on federal health care spending over the long term are uncertain, in part because they depend importantly on implementation.
But we do know that continued increases in health care costs at the rate seen in recent decades, together with the aging of the population, would put enormous pressures on the federal budget in coming years. Controlling health care costs while still providing high-quality care to those who need it will be critical, not only for budgetary reasons, but for maintaining the dynamism of the broader economy as well.
Choices regarding Medicare, Social Security and other spending programs cannot be made in a vacuum, but must be combined with decisions about how much revenue the government will raise and how it will raise it.
No laws are more basic than the laws of arithmetic: For fiscal sustainability, whatever level of spending is chosen, revenues must be sufficient to sustain that spending in the long run.
At the same time, economic vitality is enhanced when taxes are not excessive and are collected through a system that is economically efficient, equitable and transparent.
At present, a broad consensus exists that the U.S. tax code does not satisfy these criteria and is in need of reform. I suspect that it is too much to ask the commission to review the tax code in detail, but a full picture of our budgetary dilemma will require attention to the strengths and weaknesses of our current system of raising revenue...
The path forward contains many difficult tradeoffs and choices, but postponing those choices and failing to put the nation's finances on a sustainable long-run trajectory would ultimately do great damage to our economy.
White House Budget Director Peter Orszag:
The president formed the commission because he believes that the path to fiscal sustainability begins with bipartisan cooperation. If we allow the policy positions that divide us to prevent us from taking action, projected medium- and long-term deficits will threaten the health of our economy and the living standards our people enjoy.
Sustained, growing long-term deficits will increase our reliance on creditors from abroad, reduce investment in our labs, factories and businesses, and weaken confidence in the federal government's creditworthiness. Simply put, it may be easier to ignore long-term problems, but we will pay a severe price if we do so.
With that in mind, the task before you is critical and considerable, and the administration looks forward to working with you in seeking solutions.
First, we need to address the very short term. As economists from across the political spectrum have said, when the economy is weak, increases in government spending or reductions in taxes are precisely what one needs to do to boost economic growth and job creation. During an economic downturn, the key to economic growth is increasing the demand for goods and services that firms could produce with existing capacity, and those moves, that is additional spending and lower taxes, help to fill in the so-called GDP gap.
That's why it was necessary to enact the Recovery Act at the beginning of last year and additional measures since then to increase short-term demand for goods and services and encourage job creation. And it is clear from the data that the Recovery Act has played a critical role in rescuing the economy and pulling us back from the brink of a potential second Great Depression.
As the economy recovers, however, deficits switch from being beneficial to harmful, and the focus must therefore shift to reducing projected medium-term and long-term budget deficits. Under current policies, our projected deficits amount to about 5 percent of GDP in the second half of this decade, much higher than would be prudent or sustainable. Exacerbating the problem are the long-term trends that we face as the combination of rising health care costs and an aging population will, if historical trends continue, drive up the costs of the federal government's three main entitlement programs: Medicare, Medicaid and Social Security.
What will happen if we fail to address these medium- and long- term deficits? Large budget deficits have some combination of two effects. First, they can elevate interest rates economy-wide, not only raising rates on mortgages and credit cards, but also discouraging private investment and thereby robbing future workers of the productivity-enhancing capital that will make them better off.
Second, large deficits could require increased borrowing from abroad which will mortgage our future income to foreign creditors. Either way, budget deficits reduce future national income either because the nation does not have as much productivity-enhancing capital in the future or because we owe larger liabilities to foreign creditors.
Achieving both that medium-term and long-term goal will require significant changes in policy that builds on what we have done already. The options to further reduce the deficit may not be popular, but they are necessary. Success will require a commitment from both parties to engage in constructive and honest dialogue, recognizing that there is no easy way forward except through bipartisan cooperation.
In that spirit, I look forward to working with you in the weeks and months ahead, and I, along with the rest of the administration, again thank you for your service.
