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Wednesday, 29 January, 2003, 22:23 GMT
US budget deficit soars
US budget deficit

The Bush administration is heading for a record budget deficit next year, according to new estimates from the Congressional Budget Office.

The federal government's deficit is projected to reach just under $200bn in 2003-4, up from $158bn in the current fiscal year.

But budget director Mitch Daniels, who will present the new Federal budget next week, said that the figure would be closer to $300bn when new spending commitments and plans for tax cuts were added in.

That would be 3% of the size of the whole US economy, higher in dollars than the previous peak in 1992, although lower as a proportion of the total economy than in the early l980s, when the deficit peaked at 6% of GDP.

Just a few years ago, the budget office was projecting a surplus over the next ten years of several trillion dollars.

But the economic slowdown, the costs of President Bush's $1.3 trillion tax cut, and extra spending commitments have eroded that surplus.

Adding to the total government deficit are the woes of the individual states, who collectively have a deficit of over $100bn, with California alone facing a $35bn shortfall.

More spending

And in its latest budget proposals, as foreshadowed in the state of the union speech, the Bush administration is sure to add to the size of the deficit in future years.

The $672bn tax cut, which includes the abolition of the taxes of dividends, will add more than $100bn to the deficit in the next fiscal year alone.
Elderly Americans
New drug benefits for the elderly could cost $400bn

President Bush admitted that his proposal to reform Medicare, the health care programme for the elderly, and add a prescription drug benefit, will cost $400bn over ten years.

Then there are the spending commitments that Congress is likely to add, particularly in relation to homeland security, where Mr Bush's budget director, Mitch Daniels, said that spending would rise by at least 8% annually.

And there is the unknown cost of any war against Iraq, which could include not only the direct military costs of the fighting, but substantial costs of rebuilding the country and keeping an army of occupation in place for some years to come.

No political issue

But the budget deficit has failed to become the defining political issue that it was in the l990s, when the struggle for a balanced budget consumed Congress and the Clinton administration.

Former Bush welfare reform advisor Ron Haskins told BBC News Online that there were several reasons for the difference.

Firstly, the Bush administration was committed to tax cuts as its central political belief, and it intended to stick to that policy whatever other consequences there were.

Secondly, it believed that the fear of a big budget deficit would act as restraint on Congress in voting for big spending programmes.

And thirdly, they believed that in the long-term their policies would stimulate economic growth, and the increased tax revenues from growth would eliminate the deficit.

And Robert Litan, head of the Brookings Institution's economic programme, said there was another reason: low interest rates and the recession meant that financial markets were not worried that the budget deficit would be inflationary.

Long-term threat

However, in the long-term, when the economy recovered, a big budget deficit could add to the pressures on the economy, Mr Litan added.

Treasury Secretary-designate John Snow told a Congressional committee on Tuesday that, although he was worried about the budget gap, at current levels - of around 2% of GDP - it was sustainable.

In the longer term, however, a bigger problem is looming, as the surpluses in the social security trust funds - which are currently being used to subsidise the budget gap - come to an end.

The retirement of the large group of "baby boomers" will create a huge gap in social security funding, which President Bush wants to partially replace by allowing younger workers to partly privatise their social security accounts.

Meanwhile, however, either a prolonged economic slowdown or a prolonged war could put the budget issue back at the centre of the political debate.

The BBC's Justin Webb
"The president's marks for handling of the economy are slipping"

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