Bernanke: Government Must 'Eventually' Decrease Debt-to-GDP Ratio

By Matt Cover | February 26, 2013 | 11:05am EST

Federal Reserve Chairman Ben Bernanke (AP File Photo)

( Reserve Chairman Ben Bernanke said to keep the economy growing, the federal government must first stabilize the size of its debt relative to GDP and then, eventually, begin to reduce the size of the debt relative to GDP.

Currently, the Congressional Budget Office (CBO) projects that the debt-to-GDP ratio will rise in coming years, increasing the government’s debt burden.

Bernanke, testifying before the Senate Banking Committee Tuesday, said Congress must reverse this trend.

“To promote economic growth in the longer term, and to preserve economic and financial stability, fiscal policymakers will have to put the federal budget on a sustainable long-run path that first stabilizes the ratio of federal debt to GDP and, given the current elevated level of debt, eventually places that ratio on a downward trajectory,” Bernanke said.

Bernanke noted that under current law, the deficit will narrow from last year’s 7 percent of GDP to just two percent in 2015, and then begin to grow again thereafter, adding more and more debt each year.

This course, he said, must be reversed if long-term growth is to be secured by replacing the upcoming budget sequester with policies that reduce the deficit more over the longer term.

“To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”

The Fed chairman also warned that not all deficit-reduction policies are created equal, saying that Congress should not enact tax and spending policies that make it less likely that Americans will save, invest, and spend their money.

“To the greatest extent possible, in their efforts to achieve sound public finances, fiscal policymakers should not lose sight of the need for federal tax and spending policies that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure,” he said.

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