Bernanke: Control U.S. deficit, but not too quickly

Bernanke, in prepared remarks to the Rhode Island Public Expenditure Council, said the deficits had stabilized somewhat as the economy has started to recover.

"Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk," Bernanke said.

"Over the medium and long-term, however, the story is quite different. If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years," with the ratio of federal debt held by the public to national income rising at an increasing pace."

This snowball effect will cause interest payments to add to deficits and may inhibit household and business spending due to longer-term uncertainty over future tax payments, he said.

"We should not underestimate these fiscal challenges. Failing to respond to them would endanger our economic future," he said.

Bernanke suggested one way for Congress to bring the deficit under control is by adopting budget rules that go beyond the pay-as-you-go rules used in the 1990s. Unlike "paygo" which applied to discretionary spending, a new set of budget rules needs to address growing structural deficits caused by entitlements such as Medicare and Social Security benefits.

Any such fiscal rules must be transparent, deal with large structural deficits and link spending decisions by Congress to long-term budget targets.

While a budget rule is no substitute for the political will to make difficult choices, it could aid legislators in achieving fiscal discipline, Bernanke said.

"Indeed, installing a fiscal rule could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which would be good for confidence," he added "A fiscal rule could also focus and institutionalize political support for fiscal responsibility."

Bernanke said that even though the euro zone has had difficulty with budget targets being breached, many countries have found fiscal rules helpful. Switzerland, Sweden, Finland an the Netherlands all realized improvements in their fiscal situations after adopting rules that limit spending.

He cited International Monetary Fund data showing that about 80 countries that are now subject to national or supranational fiscal rules.

(Reporting by David Lawder; Editing by Andrew Hay)