By Nick Mann | 21 November 2012
Uncertainty over the US’s future budget plans could be holding back spending and investment and making the financial markets cautious, Federal Reserve chair Ben Bernanke warned last night.
Speaking in New York, Bernanke called for a speedy resolution to avoid the ‘fiscal cliff’ – the package of automatic tax increases and spending cuts that takes effect on January 1 unless political agreement can be reached on a new spending plan.
He said politicians would also have to agree a fresh increase to the US debt ceiling in the new year. A long-term budget plan was also needed to enable the US to reduce its deficit and ensure longer-term economic growth and stability.
The consequences of failing to reach timely agreement on these areas were severe, he said. The fiscal cliff could send the US economy into recession, and an unresolved debt limit could be even more damaging to economic confidence than when a similar situation arose in the summer of 2011.
‘Uncertainty about how the fiscal cliff, the raising of the debt limit, and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy,’ Bernanke explained.
‘Continuing to push off difficult policy choices will only prolong and intensify these uncertainties.’
While the details of any deal to avoid the fiscal cliff would be important, Bernanke said economic confidence among the markets and the public would also be influenced by the ability of politicians to reach an agreement with ‘a minimum of uncertainty and delay’.
‘Finding long-term solutions that can win sufficient political support to be enacted may take some time, but meaningful progress toward this end can be achieved now if policymakers are willing to think creatively and work together constructively,’ he said.
Setting federal fiscal policy on a stable path would involve the ratio of debt to gross domestic product ‘eventually’ either stabilising or declining, he added. The US federal budget deficit currently stands at around 7% of GDP but Bernanke noted that analysts have forecast it will remain above 4% of GDP by 2018 and could then increase again.
