Federal Reserve (Fed) chairman, Ben Bernanke, talked Thursday about the exposure of the U.S. economy to the debt crisis in Europe and the prospect of a fiscal policy tightening in the United States, but he didn’t mention what steps could the central bank take.
The situation in Europe means significant risks for the U.S. economy and its financial system and should be monitored closely,” said Bernanke in Congress for the Economic Committee. He added that the Fed is ready, as usual, for an intervention to protect the financial system and economy, if financial tensions will escalate. Bernanke also warned lawmakers that a severe tightening of fiscal policy, early next year, as stipulated in current legislation would represent a significant threat to the recovery.
Fed chief did not mention the possibility of further economic stimulus measures, unlike Janet Yellen, vice president of the Fed, who said Wednesday that the U.S. economy remains vulnerable to negative factors and may need additional support.
On the other hand, the Congressional Budget Office (CBO) warned that public debt relative to GDP could reach in the United States 93% in 10 years and will reach 200% in 2037, from 73% as it is now. By comparison, last year Greece had a debt to GDP ratio of 165%.
Current policies include, among others, the extention of tax exemptions decided during the term of President George W. Bush, and maintaining the Medicare program costs. Last year, the Congressional Budget Office estimated a debt of 100% in 2021. The reduction of the indebtedness estimate is based, mainly, on the adoption, last summer, of the law of budget control, which provides savings of more than 2,000 billion dollars over the next decade.
If in 2010, the Congressional organization estimated that U.S. indebtedness level will reach a record 109% of GDP in 2025, it is now expected thst this level will be recorded just one year later, according to CNBC. The current policy followed by the Congress is different from legislation currently in force, notes CNBC. Under current law, next year measures will be activated targeting tax breaks and spending cuts.
Debt situation will improve, but the economy will likely enter a recession because of these measures, warns the CBO. The current policy, according to the Commission’s interpretation implies that the U.S. legislature will find a way to avoid this situation, and it will continue on a path similar to the present one.
The estimation of 200% debt to GDP ratio for 2037 is not, however, the most pessimistic from CBO, which warns that the U.S. debt could reach 250% of GDP in 2035, according to CNBC. Founded in 1974, the Congressional Budget Office provides economic analysis to support the adoption of the budget in US Congress.
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