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.

Start your day with The Independent, sign up for daily news emails
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

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?