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AmericasMarch 7 2005

US budget proposals get a lukewarm reception

Reaction to President George W Bush’s latest budget proposals – which were presented to Congress on February 7 – has been mixed, writes Jane Monahan in Washington.
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While attempts are being made to rein in federal expenditure, the country’s longer-term fiscal imbalances are causing concern on Wall Street and among international investors, as well as in Congress, academia and Washington think-tanks.

One reason, say these experts, is that the proposed spending cuts apply only to government non-security discretionary programmes, such as housing and urban development (-11.5%), farm subsidies (-9.6%), transport (-6.7%), the Environmental Protection Agency (-5.6%) and some health and education programmes. These represent less than one-fifth of total expenditure.

It is also far from certain that all the proposed eliminations or cuts will be approved by members of Congress, as many of the federal programmes are popular in important constituencies, and congressional elections are due in less than two years.

Furthermore, the US defence budget (which many consider bloated) is set to increase 4.8% to $419bn, which would make it practically as large as the defence budgets of all the rest of the world combined.

Even more important are the items that are not included in the budget: $80bn in supplemental funding for operations in Iraq and Afghanistan; the costs of extending the first-term tax cuts, some of which are due to expire, amounting to $1000bn between 2006 and 2015, budget documents show; and the costs of President Bush’s social security reform. The transitional costs of introducing private investment accounts, the centrepiece of this reform, could run to $2000bn in extra debt in the first 10 years, according to social security administration estimates.

In the budget proposals, the White House forecasts a deficit of $427bn in 2005, declining to $233bn in 2009. The administration has stated a goal of halving the budget deficit as a percentage of GDP by 2009, from its current 3.6% level.

However, even if it succeeds, experts worry that this will do nothing to resolve the fiscal problems arising after 2009, when the costs of the tax cuts, if they are made permanent, and of new prescription drug benefits for the elderly under Medicare, the federal healthcare programme, increase.

There are also concerns that the impact of an ageing population on Medicare and Social Security will also start to be felt.

Meanwhile there are no proposals to raise extra tax revenues, even though revenue shortfalls have been the cause of two-thirds of the deterioration in US public finances since 2001.

This year’s $427bn budget deficit will bring outstanding government debt to nearly $5000bn, nearly 40% of which will have to be financed by foreign investors. This is at a time when the country’s current account deficit is running at an annual rate of over $600bn, or 5.7% of GDP.

This is a major factor in the decline of the US dollar, say US Federal Reserve officials.

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Read more about:  Analysis & opinion , Americas , US