ben s bernanke : fiscal sustainability and fiscal rules speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the annual meeting of the rhode island public expenditure council, providence, rhode island, 4 october 2010. * * * the recent deep recession and the subsequent slow recovery have created severe budgetary pressures not only for many households and businesses, but for governments as well. indeed, in the united states, governments at all levels are grappling not only with the near - term effects of economic weakness, but also with the longer - run pressures that will be generated by the need to provide health care and retirement security to an aging population. there is no way around it – meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices. but history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability. conversely, good fiscal management is a cornerstone of sustainable growth and prosperity. although state and local governments face significant fiscal challenges, my primary focus today will be the federal budget situation and its economic implications. 1 i will describe the factors underlying current and projected budget deficits and explain why it is crucially important that we put u. s. fiscal policy on a sustainable path. i will also offer some thoughts on whether new fiscal rules or institutions might help promote a successful transition to fiscal sustainability in the united states. fiscal challenges the budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9 – 1 / 2 percent of national income during that time. for comparison, the deficit averaged 2 percent of national income for the fiscal years 2005 to 2007, prior to the onset of the recession and financial crisis. the recent deterioration was largely the result of a sharp decline in tax revenues brought about by the recession and the subsequent slow recovery, as well as by increases in federal spending needed to alleviate the recession and stabilize the financial system. as a result of these deficits, the accumulated federal debt measured relative to national income has increased to a level not seen since the aftermath of world war ii. for now, the budget deficit has stabilized and, so long as the economy and financial markets continue to recover, it should narrow relative to national income over the next few years. economic conditions provide little scope for reducing deficits significantly further over the next year or two ; indeed, premature fiscal

federal reserve, which releases the range and central tendencies of projections of the individual fomc members. i would argue that the federal reserve ’ s ongoing process of transparency may also reflect the highly developed state of our financial markets and a growing recognition that, against that financial backdrop, shaping the expectations of market participants can on occasion be an important adjunct to monetary policy. i would be curious to learn the degree to which the ecb ’ s approaches to communications reflect the financial circumstances as well as the multinational nature of the institution. conclusion in conclusion, i would like to stress the importance of tommaso ’ s observation about policy that i quoted at the outset. monetary policy arrangements do, and should, adjust over time to changes in the economic and financial environment. this brief review of the history of the federal reserve shows this adjustment process at work over our ninety - year history. the charter lays out a structure for policy implementation that is appropriate for the financial system of the day. the financial system then changes and policy implementation must adapt. eventually, changes in the financial system can trigger changes in the charter that give policy implementation a new context. while there is no single best way to arrange monetary policy and central bank functions within a multiregional system, i am struck by the broad similarities between the federal reserve and the eurosystem as each grapples with a large, complex, and ever - changing macroeconomy. in some ways, your experience has collapsed into several years changes that evolved over decades for the federal reserve. but both experiences, and the ongoing changes in the economic environment in which we operate, suggest that the art of central banking is certainly likely to undergo further changes.