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Last Updated: Thursday, 6 May, 2004, 10:19 GMT 11:19 UK
The cost of the Iraq war
By Steve Schifferes
BBC News Online economics reporter

The US Congress has so far been asked to spend $187bn (104bn) on invading and then rebuilding Iraq. That sounds like a lot - but the real question should be whether it is anywhere near enough.

Tony Blair and George Bush at press conference in London
Neither Mr Bush nor Mr Blair want to raise taxes to pay for the war
The Bush administration was very clear about the need to invade Iraq - even though some of those reasons are now looking less convincing.

But it was far less straightforward about how much the military operation to unseat Saddam Hussein would cost.

And even more questions remain about the ultimate cost of rebuilding a functioning economy and civil society in Iraq.

Recent estimates, compiled from a variety of sources, suggest that the ultimate direct costs of the war and reconstruction could easily reach $600bn.

That cost could be doubled if the indirect costs of the war on lost economic output could be quantified.

Broad estimates

Clearly, for the advocates of the war, its economic costs were not the central consideration.

US military operations so far: $168bn *
Military operations (projected): $150bn-300bn
Reconstruction so far: $33bn (US $18.7bn) *
Reconstruction (projected): $50bn-100bn
Extra security: $40bn-80bn
Sources: CBO, CSIS, World Bank
* allocated for US fiscal years 2003-05

Nevertheless, the war and its aftermath could have a significant effect on the US government's growing budget deficit, and therefore potentially on the US economy.

Already, the Bush administration has been forced to ask for an additional $25bn for military operations in this fiscal year, adding to the record deficit.

And it has not yet made its supplementary request for the next financial year, which begins on 1 October - although it is expected to ask for another $80bn- $100bn after the November election.

Military costs

According to the Congressional Budget Office, a non-partisan body set up by the US Congress, the war and occupation of Iraq by 130,000 US troops costs about $4bn-5bn (2.2bn-2.7bn) per month, or $48bn-60bn per year.

Like a teenager who gets further in debt on a credit card, the Bush administration is racking up costs that will have to be paid in the future in higher taxes or lower government programs
Professor William Nordhaus, Yale University
Given recent events, many experts now believe that US troop levels of this magnitude may be needed for the next three to five years, in contrast to earlier plans to reduce troop levels to below 100,000 this year.

That would mean that military costs alone cost reach $300bn to $600bn, depending on how quickly, if at all, the US was able to train and equip a reliable Iraqi security force.

It is unlikely that other Nato counties will be willing or able to take up the burden of occupying Iraq from the US Army.

Reconstruction failure

While military costs are mounting, the money allocated to rebuilding Iraq is not being spent.

According to the Coalition Provisional Authority, only $2.77bn of the $18.4bn allocated by the US Congress for the reconstruction of the country has been spent.

Security: $710m ($3.2bn)
Public safety: $282m ($1.5bn)
Electricity: $1.2bn ($5.5bn)
Oil: $455m ($1.7bn)
Water: $41m ($4.1bn)
Health care: 0 ($793m)
Education: $32m ($259m)
Telecoms: $22m ($500m)
Roads: $8m ($370m)
Spent (Allocated)as of 28/04/04
Source: CPA, CBO, US Congress
And it is likely that the spending by other countries on reconstruction - who pledged a total of $14bn in grants and loans in Madrid last October - has been even lower, with only $1bn being released so far.

Spending is slow because - as the World Bank recognised - it is hard to ramp up spending before the institutional infrastructure exists to use the money effectively.

The deteriorating security situation is also causing further delays.

And the Coalition Provisional Authority and the Pentagon have also been criticised for being slow to organise an open bidding process for reconstruction contracts.

Oil and reconstruction

In the long run, the rebuilding of Iraq is likely to cost much more than the $33bn allocated by the West - or the $55bn needs estimated by the World Bank.

Iraqi oil pipeline
Increasing Iraq's oil output is the key to reconstruction
A substantial sum of money - perhaps as much as $50bn - is needed to develop new oilfields in Iraq, which potentially could double the country's oil output from 3m to 6m barrels per day.

But that would require a long-term investment by Western oil companies - something that would require more political stability than currently exists.

When the oil is developed (and it takes five to 10 years to bring new fields on stream), Iraq could afford to pay for its own reconstruction.

But until then, the oil revenues Iraq currently gets barely covers the running costs of its government.

Increasing the budget deficit

The Bush administration has chosen to finance the war by off-budget emergency supplemental appropriations, rather than include Iraq spending in the budget sent to Congress.

That has reduced the political flak over appropriations for the war - and has also meant that the war spending does not formally count as part of the budget deficit in the future.

In the long run, a permanent budget deficit could lead to higher interest rates and lower economic growth in the United States - with a knock-on effect of the rest of the world.

According to economics professor William Nordhaus of Yale University, these costs are "a significant burden on the federal budget, another straw on the camel's back".

"Like a teenager who gets further in debt on a credit card, the Bush administration is racking up costs that will have to be paid in the future in higher taxes or lower government programs.

"The fiscal irresponsibility is really awesome."

Further economic costs

The Iraq war could have two further economic costs.

First, it could lead OPEC countries to act more aggressively in terms of oil output and pricing.

Already, oil prices are rising over fears about the security situation in Iraq.

Higher oil prices would cut economic growth worldwide, with particularly severe effects on developing countries.

Secondly, if the Iraq war has exacerbated rather than reduced the threat of terrorism, that also has an economic cost in increased security costs and decreased confidence by investors.

Overall, either of these factors could reduce world economic growth by between 0.25% and 0.50% - or $100bn to $200bn per year, and could last several years.

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