BBC Home
Explore the BBC
BBC News
Launch consoleBBC NEWS CHANNEL
Last Updated: Thursday, 15 September 2005, 22:45 GMT 23:45 UK
Q&A: Can the US afford hurricane relief?
George W Bush sees better budget times ahead
President Bush wants $200bn in hurricane aid

The economic effects of Hurricane Katrina have yet to be fully evaluated, but already the call for federal aid to help the victims has escalated. Congress has already authorised $62bn in aid. But can the federal government, with its huge budget deficit, afford it?

What is the scale of the damage caused by Katrina?

The unprecedented scale of the destruction wrought by Katrina has yet to be fully quantified, but estimates of the cost have been rising sharply.

The insurance industry now estimates the damage to buildings and property to be in the order of $150bn, of which only some $40bn will be covered by insurance.

In addition, there is extensive damage to government-owned infrastructure such as interstate highways, ports and levees.

There is also the cost of temporarily housing and supporting the hundreds of thousands of residents of New Orleans who have been evacuated.

And it is not yet clear how difficult it will be rebuild the city after the flood waters recede - a massive undertaking in its own right.

Overall, the total cost of the hurricane could exceed $200bn.

How much is the US government likely to spend on hurricane relief?

Following the political criticism of the initial response to the hurricane, politicians in Washington are rushing to ensure that they are seen as generous as possible to the victims of Katrina.

The Bush administration first asked for $11bn in hurricane relief to the fund the activities of Fema, the Federal Emergency Management Agency.

But with Fema spending $2bn a week on rebuilding and relief, that was increased to $51bn - which Congress approved within 24 hours of the president requesting it.

About half that money will be allocated to housing, $11bn will go to infrastructure projects, and $8bn will go to public assistance.

Individual households can receive up to $26,200 in damage and replacement costs.

Now demands are growing for more public spending, especially from southern Republican senators, who have called for a "domestic Marshall plan".

And Mr Bush has made it clear that more money will be forthcoming.

Extra help with health care, unemployment, education, and housing is likely to push the federal total to more than $100bn.

How will this be paid for?

On the face of it, spending on Katrina - even at $100bn - is a small part of total US government spending of some $2.5 trillion in the fiscal year ending in October.

But the US has been running a big budget deficit, amounting to $333bn, or 2.7% of GDP, as spending has exceeded government tax revenues by a large margin.

The deficit has come down slightly from last year's record $412bn gap, and the Bush administration says it wants to halve the shortfall by 2009.

Fiscal conservatives are worried that the huge bill for Katrina could push the deficit higher again - and boost pressures for big government.

Financial markets would also be concerned if the US deficit started rising again, which could lead to higher interest rates.

Will the government need to raise taxes?

The US government could finance the increased spending on Katrina by either raising taxes or cutting spending on other items.

Public opinion polls suggest that the public supports higher taxes to help Katrina victims, by a margin of 56% to 37%.

Neither is likely to happen.

But the costs of Katrina might seriously dent the Republicans' tax-cutting agenda.

Congress had been due to vote on the Bush administration's plan to make permanent the abolition of estate (death) taxes - which are due to expire in 2010 - but this vote has now been postponed.

As for Mr Bush plan's to reform the US Social Security system - which pays old-age pensions - they were already in trouble.

Now, however, their requirement for huge "transition costs" which would increase the size of the budget deficit in the future mean they are likely to wiped off the agenda.

Spending would be even harder to curb, despite the calls of conservative think tanks like Cato for cuts in government programmes.

Congress recently passed a huge highway construction bill, which included a string of pet projects introduced by congressmen, such as a $238m bridge to an uninhabited island in Alaska.

Overall, discretionary federal spending has risen from $600bn to $900bn between 2001 and 2005, an increase from 6.5% of GDP to 8% of GDP.

And House Majority Leader Tom DeLay said that Republicans have done so well in cutting spending that there is simply no fat left to cut in the federal budget.

"Nobody has been able to come up with any (cuts) yet," he said.

What about the overall effect on the US economy?

The Katrina disaster is likely to have a significant effect on US economic growth in the third quarter of the year, reducing the country's GDP growth rate by about 0.5 percentage points.

But the additional funds for reconstruction are likely to boost GDP in the following quarter.

Any significant slowdown in growth, however, would also have a knock-on effect on the budget deficit - as it was the increased tax revenues from higher growth which helped limit the growth of the deficit so far.

The BBC is not responsible for the content of external internet sites


Americas Africa Europe Middle East South Asia Asia Pacific