- The Washington Times - Monday, February 3, 2003

WASHINGTON, Feb. 3 (UPI) — Prospects for the economy look bright in the longer term, and interest rates should go up slightly as a result — even with the budget deficit growing, a senior White House official said Monday.

"There would be a beneficial effect … for (interest) rates to rise a little bit," given that it would demonstrate demand for more money and a pickup in economic growth, said Mitch Daniels, director of the White House Office of Management and Budget.

Daniels was briefing reporters on the Bush administration's $2.25 trillion budget proposal for 2004, which anticipates a deficit of $304 billion for the current fiscal year ending Sept. 30, and totaling $1.08 trillion over the next five years.

While he acknowledged the importance of balancing the budget, Daniels repeatedly pointed out that it was "not the top or the only priority."

He emphasized the need to raise spending on homeland security and step up efforts to combat terrorism at home and abroad on the one hand, and continue cutting taxes to stimulate growth on the other.

"A weak economy would not benefit from tax increases," Daniels said in response to concerns about curtailing tax revenues at a time when expenditures are only expected to increase. Indeed, the latest budget figures do not take into account the costs of a potential war against Iraq, which former White House economic adviser Lawrence Lindsey estimated at between $100 billion to $200 billion, or up to 2 percent of gross domestic product.

The White House has argued that tax revenues would rise as the economy picked up later in the year, and thus lead to a steady decline in the deficit, even if there were a war against Iraq. The Bush administration had already presented its $670 billion economic stimulus proposal last month, which includes cutting taxes paid on dividends.

"High tax rates discourage entrepreneurship, because the successful small business owner keeps less of any additional amount that is earned," the budget report stated. "High tax rates slow the economy, and a slowly growing economy produces fewer jobs for individuals wanting to work," it added.

Still, signs of recovery remain scant, and there is concern that the proposed tax cuts will only have a limited effect on bolstering growth prospects. The stock market continues to slide, with the Dow Jones industrial average having repeatedly fallen below the psychologically critical 8,000-level.

Further, the unemployment rate has remained around 6 percent over the past year and capital spending continues to be weak.

While the Federal Reserve has tried to bolster the economy by slashing interest rates to four-decade lows, with the key federal funds target rate at 1.25 percent, many economists do not expect the Fed to tighten rates any time soon, given the fragile state of the economy amid heightened geopolitical risks.

At the same time, the OMB has ceased projecting deficit levels for the next 10 years. Instead, it's only providing forecasts for the next five years. The 10-year projections began to be issued only recently and proved largely unreliable, prompting the OMB to drop them, Daniels said.

Still, the non-partisan Congressional Budget Office last week forecast a deficit of $199 billion for this fiscal year, with a higher number in the event of military action in Iraq. Moreover, it said that there was little likelihood of a surplus until 2007.

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