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Monday, 3 February, 2003, 23:42 GMT
Bush's budget gamble
President Bush at the White House on 12 July
President Bush wants more for defence - and investors

The $2.2 trillion budget presented on Monday to Congress represents an enormous gamble.

President George W Bush is proposing a big tax cut for better-off individuals as well as substantial increases in military spending and Medicare reform - when the budget deficit is approaching a record $300bn.

We are digging ourselves into a hole that will be very difficult to get out of

Senator Kent Conrad, Democrat, North Dakota

His hope is that the big tax cut package will help restart the economy, and that economic growth will lead to more tax revenues flowing into the US Treasury.

But if it doesn't, Democrats and some moderate Republicans fear that a huge deficit could cripple the economy and lead to big cutbacks in spending programmes.

Elderly Americans
New drug benefits for the elderly could cost $400bn
Many economists are also dubious about whether the tax cuts will occur quickly enough to give a real boost to the economy.

And military action in Iraq could add another $50bn to $200bn, according to estimates by Congressional officials.

Deficit debate

Budget Director Mitch Daniels argued that there was no evidence that economic growth was affected by the current size of the deficit, which he called "moderate" at 2.7% of GDP, and well below the level of the 1980s.

He said that eliminating the deficit was a priority of the Bush administration, but not its highest priority during a time of national emergency.

There's no doubt that the president's budget is affected by the election-year cycle

Norman Ornstein, American Enterprise Institute
But Democratic Senator Kent Conrad said that the government was pursuing a policy that would lead to bankruptcy.

"We are digging ourselves into a hole that will be very difficult to get out of," he added.

Senator Conrad said that the real budget deficit, including the borrowings from the social security trust fund, was $450bn, and that the total deficit would add up to $2 trillion over 10 years.

One change in the budget process has been the elimination of these ten year projections, which Mr Daniels said were "misleading" and pointless.

Democrats charge that this change was made to conceal the long-term deficits that will emerge.

But the administration believes that the deficit is temporary, caused by the stock market crash and the short-term costs of the war against terrorism.

So far, since the economic slowdown began, tax revenues have fallen by $175bn, as capital gains taxes have been particularly hard hit.

Electoral politics

But if the budget may be dubious economics, it may be good politics, with the forthcoming 2004 election already in sight.

The Republicans believe that rewarding the "investor class" with big tax cuts - and a new savings plan - will pay both economic and political dividends.

And they are calculating that the Democrats will find it difficult to oppose the new spending commitments aimed at defending the US from attack, and helping the elderly with a new prescription drug benefit.

The budget also contains a variety of popular, although less costly measures, from boosting spending on Aids in Africa to developing a hydrogen-powered car and more money for highways and veterans.

"There's no doubt that the president's budget is affected by the election-year cycle. It's also a budget that has gone through yeoman's efforts to manipulate it so that it minimizes the real costs and maximizes the benefits," said Norman Ornstein of the conservative American Enterprise Institute.

In Congress, the budget's fate will be determined by a handful of Republican Senators, like Maine's Olympia Snowe, who called the plans "exorbitant".

But in the long term, it will be international financial markets as much as the politicians who will determine the viability of Mr Bush's plans.

If they are no longer prepared to finance the record trade and budget deficits at the current low interest rates, then rates would have to rise, hurting economic growth and increasing the cost of servicing the national debt.

 WATCH/LISTEN
 ON THIS STORY
The BBC's Justin Webb
"The president's marks for handling of the economy are slipping"

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03 Feb 03 | Americas
28 Jan 03 | Business
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17 Oct 02 | Americas
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