Fed chairman issues warning on instability of deficits

Federal Reserve Chairman Ben Bernanke warned lawmakers Wednesday that rising deficits are imperiling the nation’s fiscal health.

The stark comments from Bernanke ups the ante in a debate over whether the Obama administration and Congress must raise taxes or significantly cut spending to reduce widening budget deficits.

Bernanke said that the country’s fiscal health faces a “double challenge” from large deficits and escalating healthcare costs that will only grow as the baby boom generation retires. The deficits pose a threat to confidence in the nation’s financial markets, he said.

“Even 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 at a hearing of the House Budget Committee.

The federal debt-to-gross domestic product (GDP) ratio will be 70 percent by 2011, the highest since the 1950s, Bernanke said. The annual budget deficit is expected to hit $1.8 trillion this year, and in the longer term Medicare and Social Security costs will pinch the federal budget as their costs increase from 8.5 percent of GDP to 12.5 percent in 2030.

Bernanke said those figures mean Congress and the administration must determine how big they want the government to be, and where they want tax rates to fall to.

“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.

While Democrats on Wednesday offered praise for Bernanke, they said tax reform will be taken up next year, after healthcare reform and climate change are tackled.

“At this point, I don’t know that we’re going to go in that direction,” said Rep. Allyson Schwartz (D-Pa.).

“Oh, hell, we’ve got to straighten out our taxes,” said House Ways and Means Committee Chairman Charles Rangel (D-N.Y.). “We have other priorities — health, climate health — but there’s no question in my mind that’s a priority for the president.”

Congress should start addressing Bernanke’s concerns with a statutory pay-as-you-go measure, Rangel said. That would require lawmakers to offset new spending with either tax hikes or other spending cuts.

Obama and congressional Democrats have worked to lower taxes on the middle class, though Obama has proposed higher taxes for families with incomes above $250,000 annually.

Schwartz, the vice chairwoman of the House Budget Committee, noted that Democrats have given tax cuts to the middle class in the stimulus and have proposed more in their budget. Noting that the Democrats’ budget would cut the $1.8 trillion deficit by more than two-thirds, she said her party is committed to deficit reduction.

But she agreed with Bernanke that a combination of tax and spending changes may be needed to further reduce the deficit.

The most visible senior Democrat who has signaled openness to a new broad-based tax has been Sen. Kent Conrad (N.D.), chairman of the Senate Budget Committee. Conrad told The Washington Post last month that a national sales tax should be on the discussion table.

He praised Bernanke’s remarks on Wednesday.

“I strongly agree with Chairman Bernanke that even as we are taking steps to address the recession, we need to begin planning now for the restoration of fiscal balance,” Conrad said. “We cannot ignore the coming crisis and hope that future leaders will solve the problem. Simply put, our nation’s fiscal future is on the line.”

Conrad and Sen. Judd Gregg (N.H.), the ranking Republican on the Senate Budget Committee, want to create a bipartisan task force of lawmakers that would offer a set of proposals to either raise taxes or cut spending to reduce the deficit. Their hope is that by creating the task force, they’d remove politics from the debate.

Gregg attacked Democrats Wednesday for overspending, saying that their policies will lead to more debt and huge interest payments.

He echoed Bernanke’s call for a fiscal balance “where we can tell our children we are passing on to them a stronger nation ... not a nation facing massive inflation and the devalue of the dollar for massive tax increases.”

Leonard Burman, director of the Tax Policy Center, said Bernanke’s remarks could help bring about a more honest debate about the budget.

“It’s enormous, as he’s a Fed chairman and a Republican appointee,” said Burman, who served in the Treasury Department in the Clinton administration. “We should be talking about taxes as well as spending.”

Burman has called for a sales tax, suggesting that it be linked to expanded healthcare coverage. He said that a new broad-based tax plan won’t be taken seriously until a Republican lawmaker signals openness to it. But Burman noted that other industrialized countries have approved similar taxes in the past.

“It’s difficult for politicians because they don’t want to talk about new taxes,” he said. “But it’s not impossible.”