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Last Updated: Thursday, 15 January, 2004, 08:24 GMT
Parties switch sides on Budget gap

By Stephen Evans
BBC North America Business Correspondent

The US budget deficit is set to hit a record level of $500bn this year. But politicians are loathe to address the problem in an election year.

Dollar note cut to ribbons

It used to be thought that there was an inviolable rule of political behaviour: the Left liked to tax and spend while the Right favoured balanced budgets.

In the last decade, that old world has been turned upside down.

Republicans run the deficits while the Democrats wail about the disappearance of the Clinton budget surplus.

The deficit under Mr Bush is heading towards $500 billion a year and nearly five per cent of the country's GDP.

The president's supporters do concede that surpluses are better than deficits but say this one isn't as bad as some, not as big as the deficit of the Reagan years, for example.

The Treasury Secretary, John Snow, said that the deficit was "unwelcome" but it would be addressed.

He added though that it was caused by tax cuts that had helped the economy grow, and by the security needs of the country on which there was no choice but to pay the bills.

President Bush
President Bush: Deficits don't matter
Mr Snow said the deficit was "manageable".

On his forecasts, it would be cut in half within five years as the economy started growing.

The burden of his remarks was that the burgeoning deficit was an unavoidable irritation that good policy would diminish but not eliminate.

Critics

Contrast that with Mr Bush's critics.

Paul Krugman, the Princeton economics professor, and New York Times columnist, wrote: "If this kind of fecklessness goes on, investors will eventually conclude that America has turned into a third world country and start to treat it like one. And the results for the US economy won't be pretty".

Those results, Professor Krugman intimates, would be a reluctance to invest in American companies and a collapse of international confidence along Argentinean lines.

He mischievously cites President Bush's current chief economic advisor, Greg Mankiw, who wrote before he had the job and when he was a free agent (as Krugman puts it):

"As countries increase their debt, they wander into unfamiliar territory in which hard landings may lurk. If policy-makers are prudent, they will not take the chance of learning what hard landings in advanced countries are like".

Republican worries

Despite the easy calm emanating from the White House about the deficit, there are indications that beneath the surface some Republicans share Professor Krugman's apocalyptic fears.

Jim Nussle, the Republican who chairs the House of Representatives budget committee said he would be in favour "of the administration being much tougher, taking the toughest possible stance on fiscal discipline".

There is a view in some of the conservative think-tanks that the Republican Party has become "addicted to spending", as they put it, largely for political reasons.

They argue that "Big Government" is not what the Republican party is about, so some vigorous cutting of public spending is needed.

Tax cuts

And therein lies the problem.

The painless cuts aren't there.

Growth may be so surprisingly stunning that the budget deficit vanishes like a mist in the sun - but nobody is predicting that.

Tax rises are political death in America. Military spending is sacrosanct. Spending on health care is politically important - which leaves little to cut apart from programmes for the poor who tend not to vote.

The difficulty for the Democrats is that the slogan: "Budget Deficits are Bad" doesn't quite have the political ring to it of the Republican promise to cut taxes and "let the people keep more of their own money".

Warnings of doom tomorrow don't quite carry the political weight of jam today.


SEE ALSO:
Dollar slumps to new record low
31 Dec 03  |  Business
Q&A: Why the dollar's in decline
09 Dec 03  |  Business
The fall and rise of the euro
05 Jan 04  |  Business


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