Fed Chief Urges Cut in Federal Budget Deficit

Big federal budget deficits raise risks to the country’s long-term economic health and they need to be curbed, Federal Reserve Chairman Ben S. Bernanke said.

“The prospective increase in the budget deficit will place at risk future living standards of our country,” Bernanke said. “As a result, I think it would be very desirable to take concrete steps to lower the prospective path of the deficit.”

Bernanke’s comments on the budget deficit were contained in a written response to questions raised by Sen. Robert Menendez (D-N.J.) after the Fed chief’s appearance at a congressional hearing on the economy in February.

Last year’s budget deficit came to $319 billion, an improvement from 2004 but still the third-largest deficit ever recorded. This year, the White House is projecting that the deficit will swell to $423 billion, which would set a record in dollar terms.

The budget will come under “severe pressure” when baby boomers start retiring and collecting Social Security and Medicare benefits, Bernanke said. Against that backdrop, “I am quite concerned about the intermediate to long-term federal budget outlook,” he wrote.

The Fed chief’s written response was dated March 9 and released to the Associated Press on Tuesday.

Bernanke refrained from making specific recommendations on how Congress should get the nation’s fiscal house in order or how to handle the strain of entitlement programs in the future.

He was silent on whether Congress should reinstate budget rules from the 1990s. Those rules required that any tax cuts or increases in benefit programs such as Social Security be paid for either by raising taxes or cutting spending elsewhere.

On another matter, Bernanke repeated his interest in seeing the trade deficit trimmed too.

The broadest measure of trade, called the current account deficit, hit a record of $804.9 billion in 2005, the Commerce Department reported Tuesday. That smashed the old record of $668.1 billion, which was set in 2004.

Asked about the merits of raising the minimum wage, Bernanke said doing so could lower employment of low-skilled workers.

“My own view is that an increase in the minimum wage probably does lower employment,” he said.