"....if government spending is not curbed..."
Now what are the chance of fiscal austerity in Alice in Wonderland?
Ben Bernanke Warns of Looming Economic Crisis
In a surprisingly candid speech at the annual Rhode Island Public Expenditure Council meeting Monday, Federal Reserve Chair Ben Bernanke warned of a potentially dangerous economic future for the country if government spending is not curbed within a few years.
"It is crucially important that we put US fiscal policy on a sustainable path," Bernanke said. "We should not underestimate these fiscal challenges. Failing to respond to them would endanger our economic future."
If budget deficits continue to rise at their current pace, Bernanke said, higher interest rates could slow formation of businesses, productivity and economic growth, while a large federal debt could hurt the amount of government funds available for future emergencies, from war to natural disasters.
"The threat to our economy is real and growing," Bernanke said.
Bernanke outlined a number of "fiscal rules" for Congress to consider implementing through legislation, including constraints on total government expenditure, deficits or debt. Today, Congress operates under a "pay-as-you-go" (PAYGO ) approach that requires tax cuts and spending increases to be offset within a ten-year budget time span, but may not be strong enough for the current economy. "The key question is whether the traditional PAYGO approach is sufficiently ambitious," Bernanke said. "At its best, PAYGO prevents new tax cuts and mandatory spending increases from making projected budget deficits worse; by construction, PAYGO does not require the Congress to reduce the ever-increasing deficits that are already built into current law."
Countries like Canada, Switzerland, Finland and the Netherlands have all seen marked improvements in their budgets since adopting fiscal rules that cap government spending. According to the International Monetary Fund, approximately 80 countries have implemented similar fiscal rules. "The weight of the evidence suggests that well-designed rules can help promote improved fiscal performance," Bernanke said.
If the nation's economic challenges are not addressed in the near future, Bernanke said, "projections by the CBO (Congressional Budget Office) and others show future budget deficits and debts rising indefinitely and at increasing rates ... unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit."
According to the World Bank's "Finding the Tipping Point - When Sovereign Debt Turns Bad," the level at which a country is no longer viable to receive lending is a 77 percent public debt-to-GDP ratio. "If the debt is above this threshold, each percentage point costs 0.017 percentage points of annual real growth."