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Last Updated: Monday, 8 September, 2003, 11:28 GMT 12:28 UK
Bush fights war on two fronts

By Steve Schifferes
BBC News Online economics reporter

George Bush
Mr Bush has been promoting his tax cut plan

President Bush's call for $87bn (55bn) for the reconstruction of Iraq could signal problems ahead for his plans for economic recovery at home.

Three months after proclaiming the end of major combat operations in Iraq, President Bush has been forced to tell the American people that the struggle will be longer and more difficult than he had previously led them to believe.

The fact that he is asking Congress for more funds next year than had been requested for the actual war itself is a clear indication that the high numbers of US forces stationed in Iraq are now projected to remain there indefinitely.

And the fresh request will substantially increase the record budget deficit of $480bn that has already been forecast for 2003/04.

(The request is) breathtaking at a time when the Republican tax cuts have pushed the nation toward record deficits
Senator Bob Graham
Mr Bush will likely get his request through Congress, where Democrats as well as Republicans would be reluctant to withdraw support from US troops serving overseas.

Nevertheless, Democratic presidential contender, Senator Bob Graham, complained that the request was "breathtaking at a time when the Republican tax cuts have pushed the nation toward record deficits".

And the size of the request means that the cost of the Iraq war will begin to have a significant impact on the US economy.

What went wrong?

Many of Mr Bush's critics feel they have been proved right by the problems of the occupation, which was not as well-planned as the war.

The administration clearly under-estimated the cost of continuing US military operations in Iraq, which are now running at nearly $4bn per month - not much less than during the "combat phase".

US war funds
War-related funds requested from Congress (2002-2003) - $75bn
Funds for Iraq and Afghanistan requested from Congress (2003-2004) - $87bn
Budget allocated in March for 'stabilisation phase' - $12bn
Current cost of post-war occupation - $3.9bn/month
Budget allocated in March for 'reconstruction phase' - $7.2bn
Rebuilding cost (McKinsey estimate, July) - up to $90bn
Iraq's estimated pre-war oil revenues - $15-25bn/year
Iraq's estimated debt - $60 - 130bn
US budget deficit
Estimated 2002-2003 - $401bn
Estimated 2003-2004 - $480bn
The generals who warned that hundreds of thousands of troops would be needed for several years have been proved right, despite the dismissal of such claims by high-ranking administration officials before the war started.

Even more problematic is the growing cost of reconstruction, which is not fully costed in this latest funding request.

In its Budget request, only $20bn is allocated to reconstruction out of the $50bn to $75bn needed next year.

The Bush administration has been trying for months to persuade other countries to become major donors - as they were in Afghanistan - ahead of a conference in Madrid in October.

But it is finding it difficult to make much headway, given the deteriorating security situation which has led to the withdrawal of aid agencies and even the World Bank's reconstruction team.

And their other hoped-for source of revenue, the Iraqi oil industry, has been slow to come on stream and has been subject to sabotage, and is unlikely to have revenue of more than $10bn-$15bn this year - and much of that will go to the cost of civil administration.

Economics of the deficit

The US economic recovery is the top domestic priority of the Bush administration - and according to opinion polls, of most voters.

Over the past month, the President has been touring key states in the Midwest promoting his "jobs and growth" tax cut package, which was passed in the spring to boost the economy.

But the size of that tax cut package was limited by moderate Republican Senators to $350bn - less than half of what the President wanted - over fears of the soaring deficit.

Those Congressional concerns will now be enhanced.

It will make it harder to reach compromise on future spending plans, including the high-profile $300bn bill to expand prescription drug benefits to senior citizens who are covered by the government health insurance scheme Medicare.

That proposal is now stalled in a debate between House and Senate Republicans over cost containment to counter-balance any future spending commitments.

And the huge deficit may ultimately force the Federal Reserve to raise interest rates, slowing down the economic recovery.

The budget imbalance - much of which is financed by foreign purchases of US Treasury bonds - could also put pressure on the dollar, which has already fallen by 30% against major currencies.

Democrats' dilemma

In the short-term, however, growing cost of the war has provided a boost to the economy.

The US economy grew in April to June by its strongest rate in six months, 2.4%, as the huge increase in defence spending boosted growth.

However, the projected growth rate next year will not be enough to reduce the unemployment rate, which is more than 6% - enough to hurt Mr Bush politically.

And the Democrats are beginning to sense Mr Bush's increasing vulnerability.

Mr Bush is determined not to suffer the fate of his father, who failed to win re-election in 1992 despite his triumph in the first Gulf War because of an economic recession.

But ironically, it may be the Iraqi war, once considered his greatest political strength, that will prove his Achilles heel.

Tax cuts have worked, says Bush
01 Sep 03  |  Business
Iraq war adds to US budget trouble
26 Aug 03  |  Business
US economy confounds the sceptics
12 Aug 03  |  Business
IMF warns US on deficit
28 Aug 03  |  Business
Bush's tax cut politics
13 May 03  |  Business
Congress limits tax cut package
11 Apr 03  |  Business

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