While deficits are unavoidable in the near future, the nation's fiscal path is unsustainable and the federal budget could face debt-to-gross-domestic-product ratios of more than 100 percent within the next 10 years, Bernanke warned the Joint Economic Committee.
“A credible plan for fiscal sustainability could yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence,” Bernanke told the committee. “Addressing the country's fiscal problems will require difficult choices, but postponing them will only make them more difficult.”
Bernanke has stepped up his warnings about the budget deficit, including last week when he gave a speech stating that entitlement reforms, spending cuts and tax increases needed to be considered by the government because of the growing deficit.
The worst recession in decades has drastically impacted the nation’s finances.
The Obama administration and the nonpartisan Congressional Budget Office have estimated that this year’s deficit could reach $1.6 trillion. Future annual deficits are expected to recede slightly, but are still expected to remain at about 4 to 5 percent of GDP through 2020.
Higher deficits will lead to a greater amount of debt held by the public, Bernanke said. He estimated public debt would eclipse 70 percent of the country’s gross domestic product by the end of fiscal 2012.
He said the deficit could rise as high as 9 percent of GDP by 2020 and that federal debt could rise to more than 100 percent of GDP.
“It's fair to say that 4 to 9 percent is not sustainable and it’s very important to consider how that will change looking forward,” he said.
Although Bernanke doesn't expect any major changes to affect the deficit and debt this year, he said fiscal policy will need to change over the medium term to lower deficits.
Bernanke noted signs of an economic recovery, including data released Wednesday that showed an increase in retail sales, and relatively flat inflation. But he voiced concern about the amount of time needed to restore more than 8.5 million jobs lost in the past two years and noted that 44 percent of those unemployed in March had been without a job for six months or more.
“Long periods without work erode individuals' skills and hurt future employment prospects,” he said. “Younger workers may be particularly adversely affected if a weak labor market prevents them from finding a first job or from gaining important work experience."