Page last updated at 09:04 GMT, Thursday, 30 October 2008

Economic challenges confront rivals

By Steve Schifferes
BBC News

A lender-owned home is for sale in southern California
A collapse in the housing market has contributed to the slowdown

As the US economy is officially entering a sharp slowdown, both US presidential candidates Barack Obama and John McCain have been campaigning hard on tax and spending.

But neither have accepted that the recession could have a serious effect on their plans, and both claim that they will balance the budget.

Many experts say that both candidates' current policies would lead to a ballooning budget deficit.

The cost of the financial bail-out could double US government borrowing from $455bn (274bn) this year to nearly $1 trillion next year - a record 7% of GDP.

Nevertheless, both candidates are still promoting their plans for additional spending and further tax cuts.

Mr Obama wants to introduce an emergency stimulus package to help boost the economy, and new investments in energy and infrastructure - as well as tax cuts for everyone earning less than $250,000.

History has not been kind to presidents who stubbornly cling to preconceived agendas
Concord Coalition

Mr McCain says that he will freeze domestic, non-military spending to balance the budget, but has also proposed large tax cuts.

And both are proposing major changes to improve the healthcare system that could cost hundreds of billions over their first term.

Budget problems

John McCain, Meg Whitman, John Taylor campaigning in Pennsyvlania
Mr McCain aims to control Federal spending by eliminating "earmarks"

Commentators on both sides of the political spectrum agree that budget constraints are likely to be the biggest difficulty for the next administration.

They add that promises to balance the federal budget are unlikely to be realised as the recession intensifies.

According to the independent Tax Policy Center, both candidates' policies would increase the deficit further.

It estimates that Mr McCain's plans would cut tax revenues by $4.1 trillion over 10 years, while Mr Obama's plans would amount to a $2.9 trillion tax cut over the same period.

James Horney of the left-leaning Center for Budget and Policy Priorities, says that the growing size of the federal deficit will make it hard to pass any new spending programmes.

And the conservative Concord Coalition says that both candidates will have to recognise they are not coming into office with a blank slate.

"The next president will confront the reality of real economic and budgetary constraints - not just political ones - on how quickly and vigorously he can push through the agenda he promised while campaigning," says the group, which campaigns on fiscal responsibility.

"History has not been kind to presidents who stubbornly cling to preconceived agendas."

It is harder to measure spending pledges because both candidates have been non-specific in many areas.

They have both claimed to be able to control Federal spending, Mr Obama by "taking a scalpel" and Mr McCain by eliminating "earmarks" where Congressmen get special projects for their districts.

But it is not clear where the cuts of the scale needed will come from, and the savings would only take effect later, while the tax cuts would come into effect immediately.

Recession fears

Senator Obama at the White House bail-out crisis meeting
Mr Obama is getting ready to "taking a scalpel" to Federal budgets

The speed of the US economic downturn has outpaced the policy-making process of the campaigns.

In the last few weeks, both Mr McCain and Mr Obama announced additional proposals to help some of the groups hurt by the slowdown, including retired people, homeowners, and the unemployed.

But an analysis of these plans suggest they are unlikely to have a major effect on the recession.

"Most of the proposals are very poorly targeted and would do very little to address the fundamental problems caused by the economic downturn," says Roberton Williams of the Tax Policy Center.

He suggests that many of the proposals "would do little good and could have unintended and counter-productive side effects".

To deal with the looming recession, Mr Obama has also backed calls from Congressional Democrats for a new economic stimulus package similar to the one-off tax cut plan implemented in July.

In this, he has been backed up by the powerful head of the Federal Reserve, Ben Bernanke, who said recently that "consideration of a fiscal package by the Congress at this juncture seems appropriate".

However, neither the rate cuts nor the fiscal stimulus are likely to be enough to avoid a sharp slowdown in the US persisting throughout 2009, according to most economic forecasters.

International concern

The US economic crisis has become the focus of worldwide concern.

According to new global polling by Porter Novelli/GlobalNR, citizens of all 15 countries they surveyed, with the exception of China, expect economic conditions to worsen.

And by and large they blame the US for the economic slowdown, with the largest number agreeing in Japan and Germany - and most say that this has tarnished the global image of America.

However, there is a widespread expectation that conditions will improve under a US administration led by Mr Obama.

With the growing likelihood of a US recession, and the tough economic choices facing any new president, it is not clear whether these hopes will be met.

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