A $4 trillion reduction of the U.S. budget deficit, if enacted by Congress, would trim economic growth by one percentage point a year for the next decade, BlackRock Chief Executive Laurence Fink said.

With analysts already forecasting modest growth of 2 percent to 3 percent annually, that would leave the United States with an economy expanding at only about 1 percent a year, Fink said at the Morningstar investment conference on Friday.

Still, such deficit reduction is critically needed, Fink said. I don't think we have a choice, Fink said. We've lived way beyond our means.

As a result, the government needs to work more closely with the private sector to bolster the economy, said Fink, who heads the world's largest money management firm.

He recommended raising tax rates on dividends so they are above those for capital gains and altering mark-to-market accounting standards that do not apply equally to corporate assets and liabilities.

Cutting corporate tax rates would encourage job growth from small businesses and multinationals, creating more jobs in the United States, he added.

Without significant deficit reduction, the United States budget is at great risk from even a small rise in interest rates, which could send debt service costs skyrocketing, Fink said. A 1 percent increase in rates would cost the government $140 billion in higher debt payments, he said.


For 2011, BlackRock has lowered its economic growth expectations, Fink said. The company expects the U.S. economy to expand 2 percent to 2.5 percent this year, not the 2 percent to 3 percent forecast six months ago. We may even see 1.75 percent, he said. The economy has weakened.

Fink said he is not bearish on the bond market, though rates could rise slightly from current levels.

In general, long-term investors should favor a globally diversified portfolio of stocks over bonds in today's market, Fink said.

Equities are a better long-term investment than bonds at these prices, he said. But investors do not own enough stocks because of lingering fears from the past decade, Fink said. Equities are the most underinvested asset class in the world.

While some analysts have forecast huge problems for municipal securities, Fink said the market will be fine and solid with only smaller, more obscure issuers running into financial difficulties.

(Editing by Lisa Von Ahn and Steve Orlofsky)