Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner have been vocal this week regarding the need to rein in our growing federal budget deficits as the economy begins to recover and work to confront the structural fiscal imbalances projected over the coming decades.
Yesterday, Chairman Bernanke testified before the House Budget Committee and spent a portion of his testimony focusing on fiscal policy. He emphasized that it is necessary for policymakers to confront these challenges now more than ever. A failure to act, Bernanke noted, will result in economic consequences which will impede growth:
Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement 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. In particular, over the longer term, achieving fiscal sustainability--defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth--requires that spending and budget deficits be well controlled.
Secretary Geithner echoed those sentiments abroad in China at the beginning of the week. As the largest foreign holder of Treasury securities, China has been closely monitoring developments in the United States. In recent months, Chinese officials -- like Premier Wen Jiabao -- have publicly speculated about the security of their investments due to the large borrowing needs implied by the federal budget's projected outlook. Thus, Geithner attempted to allay these concerns during his speech on strengthening U.S. and China's economic relationship:
The President in his initial budget to Congress made it clear that, as soon as recovery is firmly established, we are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term. This will mean bringing the imbalance between our fiscal resources and expenditures down to the point – roughly three percent of GDP — where the overall level of public debt to GDP is definitively on a downward path. The temporary investments and tax incentives we put in place in the Recovery Act to strengthen private demand will have to expire, discretionary spending will have to fall back to a more modest level relative to GDP, and we will have to be very disciplined in limiting future commitments through the reintroduction of budget disciplines, such as pay-as-you go rules.
The President also looks forward to working with Congress to further reduce our long-run fiscal deficit.
The Concord Coalition welcomes this focus on fiscal responsibility and economic growth. We have consistently noted that the two are intrinsically linked, and failing to live within our means at the federal level only compounds efforts to ensure future generations are better off. Furthermore, we have tried to highlight in prior issue briefs and letters to the President that efforts taken in the immediate term to address the economic downturn should not inhibit policymakers from addressing the long-term challenges we face. Such a point was made by Chairman Bernanke yesterday: "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 the restoration of fiscal balance."
To that end, as the President and Congress look to overhaul the nation's health care system, it is imperative that any reform effort seeks to bend the cost-curve and produce savings. In a system which is already unsustainable, any decision to deficit finance coverage extensions without identifying sources of revenue or spending offsets, should be rebuffed by policymakers. Such a standard should not only apply for health care reform, but other policy decisions as well.
--Jonathan DeWald