’ speeches normal rate of unemployment is between 5. 2 and 6. 0 percent. the statement noted that these statutory objectives are generally complementary, but when they are not, the committee will take a balanced approach in its efforts to return both inflation and employment to their desired levels. fiscal policy challenges in the remainder of my remarks, i would like to briefly discuss the fiscal challenges facing your committee and the country. the federal budget deficit widened appreciably with the onset of the recent recession, and it has averaged around 9 percent of gross domestic product ( gdp ) over the past three fiscal years. this exceptional increase in the deficit has mostly reflected the automatic cyclical response of revenues and spending to a weak economy as well as the fiscal actions taken to ease the recession and aid the recovery. as the economy continues to expand and stimulus policies are phased out, the budget deficit should narrow over the next few years. unfortunately, even after economic conditions have returned to normal, the nation will still face a sizable structural budget gap if current budget policies continue. using information from the recent budget outlook by the congressional budget office, one can construct a projection for the federal deficit assuming that most expiring tax provisions are extended and that medicare ’ s physician payment rates are held at their current level. under these assumptions, the budget deficit would be more than 4 percent of gdp in fiscal year 2017, assuming that the economy is then close to full employment. 2 of even greater concern is that longer - run projections, based on plausible assumptions about the evolution of the economy and budget under current policies, show the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to gdp rising rapidly. this dynamic is clearly unsustainable. these structural fiscal imbalances did not emerge overnight. to a significant extent, they are the result of an aging population and, especially, fast - rising health - care costs, both of which have been predicted for decades. notably, the congressional budget office projects that net federal outlays for health - care entitlements – which were about 5 percent of gdp in fiscal 2011 – could rise to more than 9 percent of gdp by 2035. 3 although we have been warned about such developments for many years, the time when projections become reality is coming closer. having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus

reduce productivity growth. to the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign - held federal debt. high levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events. the congressional budget office ( cbo ) reported an “ alternative fiscal scenario ” ( table 1 – 7, p. 22 ) that assumed that most expiring tax cuts and the medicare “ doc fix ” would be extended and also that the automatic spending reductions required by the budget control act ( bca ) would not take effect ; under this scenario the deficit would be about 5 percent of gdp in fiscal 2017. if the automatic spending cuts from the bca, however, are assumed to be put in place ( the effects of which are shown in table 1 – 6, p. 18 ) then the deficit would be more than 4 percent in fiscal 2017. see congressional budget office ( 2012 ), the budget and economic outlook : fiscal years 2012 to 2022. washington : congressional budget office, january. this projection is under the alternative fiscal scenario developed by the congressional budget office, which assumes most current policies are extended. see congressional budget office ( 2011 ). the long - term budget outlook. washington : congressional budget office. bis central bankers ’ speeches even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. as we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the u. s. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point. to achieve economic and financial stability, u. s. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. attaining this goal should be a top priority. even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. fortunately, the two goals of achieving long - term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible – indeed, they are mutually reinforcing. on the one