- The Washington Times - Saturday, February 8, 2003

LONDON, Feb. 8 (UPI) — Never mind the New England background, the man is truly a Texan. U.S. President George W. Bush is thinking big in the 2004 fiscal year budget he sent to the Congress this week: big spending, big deficits over the next few years, and big debt. And yet, where all three are concerned, he may not be thinking nearly big enough.

The budget proposal is one of those acts of government which, beneath a bland exterior, is truly shocking: a Sex Pistols record misleadingly placed in a brown, time-worn dust-jacket tranquilly labeled "A Little Night Music." Bush's plans are audacious. The question is whether one considers them courage or folly.

Bland exterior? Consider these phrases from the Budget Message of the President. "It restrains the growth in federal spending and addresses the long-term fiscal challenge presented by Medicare and Social Security's unfunded promises." How sober. Federal spending will rise by no more than 4 percent. But the budget as a whole is certainly not about restraint. That is why its dust jacket is misleading.

The audacity begins with what Bush has done already. In 2000, the final year of his predecessor Bill Clinton's term, the budget surplus was of $236.4 billion. Two years later that had swung to a deficit of $158 billion: the most rapid deterioration in federal history, with the budget position shifting by about 4 percent of GDP.

Now, the new budget document estimates that in the 2003 fiscal year the federal deficit virtually doubled from the previous year to $304 billion, the largest deficit the United States has ever had in nominal terms, though, at less than 3 percent of GDP, not nearly as big in real terms as the 6 percent of GDP deficit racked up by Ronald Reagan, one of the presidents by whom Bush appears most to be inspired.

Bush, then, has some way to go to emulate his hero. But he may get there with surprising speed. For the restraint this budget promises is based on some happy assumptions and, more importantly, omissions.

The first omission is war with Iraq. Most readers would agree that a U.S. and British attack on Iraq, sanctioned by the United Nations or not, looks likely. Its costs are going to be high. In the Gulf War of a decade ago little of the cost of about $60 billion was met by the United States. Kuwait, Saudi Arabia and other countries paid up.

This time round, the likely cost would seem to begin at about that $60 billion level and could go much higher, particularly if prolonged occupation of Iraq is necessary, as seems probable. And little of the cost seems set to be borne by nations other than the United States and Britain.

Thus the $15 billion increase in the federal defense budget for 2004 compared with 2003 looks utterly inadequate. Let us say, conservatively perhaps, that war with Iraq adds $50 billion in defense spending costs. The 2004 U.S. fiscal deficit climbs by the same amount, and is more than 16 percent bigger than budgeted.

Where defense — or should we say offense — is concerned, Bush may have little choice. Reagan-style he is turning up the heat on America's enemies. But in other areas Bush might be able to compensate, and that would be in keeping with his rhetoric.

He has been fond in the past six months of chastising the Congress for being too ready to spend. "If Congress won't show spending restraint, I intend to force spending restraint," he said in his economic forum in Waco, Texas in August last year. But there is not much sign in this budget of a Bush who wants to force restraint. He cuts spending in only two departments, Labor and Justice, and by insignificant amounts. In all other departments of government, spending keeps rising.

Health care is one important area in which the government keeps spending a lot more. The new budget includes a commitment costing $400 billion over 10 years to "modernize and reform Medicare for its 41 million eligible beneficiaries to improve care, including a prescription drug benefit option while ensuring its long-term financial viability."

Many readers may judge this a good thing, or at least inevitable given that the population is living longer and health treatments are growing more expensive. But the fact is that between the actual number for 2002 and the budgeted one for 2008, federal spending on Medicare, the government health program for the elderly, and Medicaid, government-funded medical care for low-income families, the disabled and the elderly in nursing homes, and Social Security — in combination, the government's "mandatory spending" — are forecast to rise by almost a third (in six years.) Someone has to pay sometime.

And that, overall, is the problem with Bush's budgeting: he spends big, especially on defense and health, and he doesn't, despite his words for Congress, save. And meanwhile he cuts taxes.

Given those tax cuts, the revenue side of the budget looks over-optimistic. The budget estimates that revenues rise by only 0.8 percent in the current, 2003, fiscal year but in 2004 and 2005 the revenue increases are considerable: of 8.8 percent in 2004, and of 10 percent in 2005.

Why do revenues climb so much despite the tax cuts? The reason is that Bush's budget assumes the tax cuts work and foster growth and therefore higher tax revenues. The budget assumes GDP growth of 3.6 percent in the 2004 fiscal year and of 3.5 percent in the 2005 one. These are not high numbers by the standards of the past but whether the currently ailing U.S. economy can achieve them is in doubt — particularly if a war in the Gulf is about to intervene.

It can be argued that the Bush approach is justified. The government is pumping money into the economy at a time when it appears to need it. But the cost of such a policy is also clear: a rising deficit and rising debt.

The Bush administration is bumping up this month against the ceiling for the permissible level of debt of $6.4 trillion. It needs the Congress to allow it to increase that statutory maximum, and no doubt Congress will do so or the U.S. government would face the shame — and catastrophe given its financing needs — of defaulting on its debt payments.

In the budget numbers presented now, the statutory maximum debt projected by the administration keeps going up, by around half a trillion dollars per year, enabling Bush to increase the Treasury's debt level by over half from 2002 to 2008, from $6.2 trillion dollars to $9.4 trillion dollars. Of course, these are just projections of a ceiling which not even a tall Texan may need to touch with his Stetson. But on current trends it looks far from unlikely that Bush will load more and more debt on to Americans' backs.

Well, alright, so did the generally well-regarded Ronald Reagan. But the question is whether Bush's Reaganite policy is the right one for his times. Reagan selected his expansionary policy at a time of spare capacity. Bush's pump-priming comes after an economy over-heated by the stock market boom has slowed, but with unemployment still low by historical standards, and house prices soaring. Is now the time to pump prime the economy?

The policy problem is a difficult one because the current predicament is unusual. After an asset price bubble, a combination of very low interest rates and of tax cuts has not (yet) propelled the economy toward robust growth. Our feeling is that policy is mistaken, that the economy needed a downturn to correct some of the excesses of the boom years and that Bush (and U.S. Federal Reserve Chairman Alan Greenspan) would have been better not to have relaxed policy so much in 2001-2.

But now, having done that, Bush is embarking on his third round of tax cuts, despite the swelling deficit. We are back to the days when government believes you can budget your way to economic success, even if, unlike in the past, you don't believe in higher government spending.

Are tax cuts a universal economic cure? Even in the current post-bubble U.S. economy? Big bold George had better hope so.

(Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to icampbell@upi.com)


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