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Skepticism Over Bush Pledge to Slash Deficit
Published on Wednesday, January 28, 2004 by the Financial Times/UK
Skepticism Over Bush Pledge to Slash Deficit
by Christopher Swann in Washington

George W. Bush, US president, is increasingly eager to cast aside his reputation as a spendthrift.

In his State of the Union address last week, the president addressed mounting concern over the ballooning budget deficit by reminding the nation of his longstanding pledge to cut the deficit in half within five years.

This, he said, could be achieved by limiting rises in discretionary spending to 4 per cent a year.

But with revenue-losing proposals coming thick and fast from the White House, doubts are growing about the administration's commitment to cutting the deficit.

The skeptics are divided into those who think the president will fail and those who consider that the pledge is far too timid anyway.

The first group felt vindicated by fresh forecasts this week by the Congressional Budget Office. The deficit - running at about 4.2 per cent of gross domestic product or $477bn a year - is forecast to narrow to around 1.8 per cent of GDP in the fiscal year 2009 or $268bn. This, however, assumes that discretionary spending rises at little more than the rate of inflation and that the president allows his previous tax cuts to expire as scheduled.

Neither of these looks likely. "Put in more realistic assumptions and the deficits would be between 3-4 per cent by 2009," said Isabel Sawhill, a senior fellow at the Brookings Institution.

Mr Bush has said the tax cuts will remain in place. The administration is also set to reform taxes on the very wealthy to prevent them from affecting the middle class. Together these would take a projected deficit of $268bn to $458bn - about 3 per cent of GDP.

A second worry is that the combination of the Republican Congress and the Bush administration will be unable to curb its spending. The aim of limiting rises in discretionary spending to 4 per cent a year is harder to achieve because the administration has made it clear that defense and homeland security are exempt from any limitations.

As Chris Edwards, director of fiscal studies at the Cato Institute, observes, if you take out defense and homeland security, there is not much discretionary spending left.

"Their claim to be fiscally responsible applies only to a tiny portion of the budget," he said. "Non-defense and non-entitlement spending is only 20 per cent of the budget. Why should they not be responsible on the other four fifths of the budget?".

Defense spending, for example, has risen from $300bn in 2001 to $450bn in 2004. Mr Edwards, along with other experts, also has his doubts about the ability of the administration to restrain spending in the one-fifth of the budget they have set aside.

The administration's record on discretionary spending has tended to far exceed the pledges of caution.

Outlays on discretionary spending rose by 13.1 per cent in 2002, 12.5 per cent in 2003 and 9 per cent in 2004.

If discretionary spending rises at the same rate as nominal GDP - which some economists consider more likely - this would add a further $134bn to 2009's deficit, giving a figure of 4 per cent of GDP.

Nigel Gault, director of US research at Global Insight, the consultancy, thinks that even if the Bush administration manages to stick to its spending pledges in a second term, it would still leave the next president in a pickle.

The year 2008-9 has an ominous significance, marking the first tranche of retirements from the bulging baby-boomer generation.

"America's fiscal problems should really start to become apparent around this time," said Mr Edwards. However disciplined the president becomes on discretionary spending, the inflexible entitlement spending would become a problem in 2008-9. Entitlement spending - mostly social security, Medicare and Medicaid - is on course to consume 54 per cent of government spending in 2004. It has been rising by about $50bn annually in recent years. This would start to accelerate dramatically after 2008-9 and was expected to be rising by about $100bn a year in 10 years unless entitlements are curbed. Mr Bush has already added to these long-term entitlements by introducing subsidies for prescription drugs for the elderly.

"If the US ever needed a balanced budget it will be in 2008-9," said Mr Gault.

Cutting the deficit in half may sound impressive but the administration would still leave a substantial structural deficit as public finances came under their greatest pressure in a generation.

It has not escaped the skeptics that by 2009, even a second Bush administration would be out of office and could not be held to account.

© Copyright The Financial Times Ltd 2004


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