US budget deficit is not sustainable, Bernanke warns

Ben Bernanke took his "something must be done" message about the US deficit to Capitol Hill once again yesterday, telling lawmakers that they risked riling financial markets if they fail to tackle the exploding costs of government health and social security programmes.

The Federal Reserve chairman took a soothing tone about the short-term prospects for the US economy, saying that problems in the eurozone will have only a "modest" effect on the recovery, but said that the country's longer-term financial trajectory was "unsustainable".

In testimony to the House of Representatives' budget committee, he took a swipe at deficit hawks who want swingeing cuts to government spending immediately, saying the economy was too fragile to withstand the withdrawal of the economic stimulus.

But he urged Congress to reassure markets that it could be serious about tackling the deficit in the longer term. While the deficit is projected to fall from a peak of 10.6 per cent of GDP next year, it bottoms out late in the current decade at more than 3 per cent, the figure commonly regarded as sustainable by economists, he said.

"A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy," Mr Bernanke said, "show a structural budget gap that is both large relative to the size of the economy and increasing over time."

While the US government is currently funding its $12 trillion debt at historically low interest rates, since its bonds are seen as a safe haven from turmoil in sovereign debt markets elsewhere, financial markets could turn against the country, with serious consequences, he said.

"Right now is not the time to radically reduce our spending, or raise our taxes, because the economy is still in recovery mode and needs that support. However, the risk, of course, of ongoing deficits is the potential loss of confidence in markets and the way to reassure the markets is by creating a plausible plan for a medium-term stability in the fiscal situation. Obviously you can't run deficits of 10 per cent of GDP forever."

The Fed chairman – made more politically astute by the furore surrounding his appointment to a second term in the post earlier this year – steered clear of offering any views on which government spending programmes ought to be cut. But he pointed out that social security spending and government health insurance schemes contributed the most to the projected deficits.

Equity markets rallied on Mr Bernanke's testimony, after he said the US recovery had made "an important transition from being supported primarily by inventory dynamics and by fiscal policy toward recovery being led now more by private final demand, including consumer spending". He said that any slowdown in Europe as a result of austerity measures would not significantly upset the US recovery.

Sport
A 'Sir Alex Feguson' tattoo
football

Arts and Entertainment
Liam Neeson said he wouldn't
tv

Liam Neeson's Downton dreams

Voices
voicesApple continually kill off smaller app developers, and that's no good for anyone
Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
voicesIs a huge gamble on oil keeping the First Minister up at night?
PROMOTED VIDEO
Arts and Entertainment
Ben Whishaw is replacing Colin Firth as the voice of Paddington Bear
tv

Thriller is set in the secret world of British espionage

Life and Style
life

News
ScienceGallery: Otherwise known as 'the best damn photos of space you'll see till 2015'
Travel
travelWhy Japan's love hotels are thriving through an economic downturn
Life and Style
fashion

Bomber jacket worn by Mary Berry sells out within an hour

Life and Style
Alexander McQueen A/W 2014
fashionPolitics aside, tartan is on-trend again this season
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Rapper Jay Z performs on the Pyramid Stage at Glastonbury in 2008
musicSinger sued over use of the single-syllable sample in 'Run This Town'
Sport
Joel jumps over the board...and into a giant hole
footballFrom joy to despair in a matter of seconds
News
i100
Arts and Entertainment
Pointless host Alexander Armstrong will voice Danger Mouse on CBBC
tv

Much-loved cartoon character returns - without Sir David Jason

Arts and Entertainment
Meera Syal was a member of the team that created Goodness Gracious Me
tv

Actress to appear in second series of the hugely popular crime drama

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Audit Manager Central Functions

To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...

Credit Risk Audit Manager

Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week