Bernanke: Finding fiscal balance crucial

Federal Reserve Chairman Ben Bernanke told lawmakers Wednesday to begin planning immediately to restore a balance between government spending and taxes.

Bernanke, appearing before the House Budget Committee, said that the country faces a "double challenge" to its fiscal health posed by rising debt levels and the upcoming health costs from the retirement of the baby-boom generation.

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He noted that the federal debt-to-GDP ratio will be 70 percent by 2011, the highest since the 1950s, and that the boomers' retirements will happen in the next five to 10 years.

"[E]ven as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for restoration of fiscal balance," Bernanke said.

He said that the country must confront how much of the economy it wants to devote to government programs.

"Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run," he said.

Bernanke, however, said that the extraordinary measures taken by the Fed and lawmakers to help the struggling economy were necessary, even as they added to the debt.

He said that the $787 billion stimulus may boost economic growth by more than 3 percent and employment by as much as 3.5 million jobs. The bank bailout averted "a very serious calamity" in the financial sector, which was a "major accomplishment," he said.

But unless the country acts to limit debt levels, the government will end up paying more in interest, leading to an "unsustainable situation," Bernanke said.

In the short term, the economy will start to improve later this year, he said. Even though businesses are still cautious, he pointed to declining inventories and construction of new homes as evidence that the recession may be slowing. Unemployment, however, will likely rise even as the economy begins to grow.

Bernanke added that the Fed believes inflation will remain low since many resources aren't being used and since the economy is expected to improve.

Bernanke said that the budget proposed by President Obama wasn't very clear on how he would draw down the deficit.

"A lot of the budget that was presented was placeholders and broad plans and themes," Bernanke said. "I think the proof will be in the pudding."

He said that the "critical issue" is how lawmakers and the Obama administration match their spending proposals, particularly for healthcare reform and climate-change legislation, with revenue.

"This is all about execution," he said.