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ANALYSIS: Analysts divided over Bush's tax relief plan

US President George W. Bush is shown addressing the country's economic woes on a bank of televisions at J&R Music and Computer World in New York on Friday. Bush, acknowledging the risk of recession, proposed about US$145 billion in tax relief. PHOTO: AP

Is the economic stimulus plan of at least US$140 billion expected to come out of Washington the right medicine for an ailing US economy, or an election-year fiscal folly?

Some analysts say the plan outline proposed on Friday by President George W. Bush may be enough to help keep the world's largest economy out of recession, or at least make the anticipated downturn a mild one.

Although there is no specific plan on paper, some lawmakers and officials are pressing for tax-rebate checks of at least US$300 per taxpayer and some are calling for as much as US$800 per person or US$1,600 per household, in addition to various business tax breaks.

Bush said the package "must be big enough to make a difference in an economy as large and dynamic as ours, which means it should be about 1 percent of GDP."

Treasury Secretary Henry Paulson said that on that basis, the package should be "in the neighborhood" of US$140 billion to US$150 billion.

Nariman Behravesh, chief economist at the research firm Global Insight, said that such a plan could help avert or minimize a potential recession for an economy buffeted by a horrific housing slump and troubled credit markets.

"It will have an effect on the economy, assuming the impact is in the second or third quarter," Behravesh said, adding: "It could prevent a recession."

James Marple, economist at TD Bank Financial Group, said Federal Reserve Chairman Ben Bernanke "gave credence to the notion that fiscal policy can be used as an effective tool to stave off a US recession" in his comments to Congress on Thursday.

"There is some historical precedence for a stimulus package at least mitigating the impacts of a recession," Marple said.

"In 2001 tax refunds of US$300 per person were sent to households across the country. A study of the program found it to be quite successful ... The rebates contributed to a rebound in consumption in the final quarter of 2001 and is one factor thought to have helped make the 2001 recession the shortest and mildest on record," he said.

Other analysts were more skeptical.

Avery Shenfeld at CIBC World Markets said the plan appears to be more political than economic.

"Americans don't mind running up their credit cards to the max and don't seem to care much if their governments do the same," he said.

"With the US economy faltering and hanging over the precipice of recession, the White House is going to pull out all stops to ensure that the economy is moving along come the first Tuesday in November," Shenfeld said.

Robert MacIntosh, chief economist for Eaton Vance Corp, said that the plans being discussed would be less effective than permanent tax changes: "I can't see handing checks to people as being effective."

"All it does is increase the deficit," MacIntosh said.

Robert Brusca at FAO Economics argued that the US economy is not yet in recession, with the most recent data from the third quarter showing solid growth.

He said that too much fiscal medicine may result in a "horror movie" scenario that brings inflation back from the dead.

"In our story, the Fed and the government are applying artificial resuscitation and intravenous feeding to encourage the recovery of the now undead patient [the economy]," Brusca said in a research note. "Where do you think that takes us? Probably to the next horror story and that one will not star growth as much as it will star inflation."

But economist Ethan Harris at Lehman Brothers said that the plan could be positive overall.

"If a recession is looming, fiscal action must be quick and tax rebates are probably the fastest way to get money into the economy," he said. "Perhaps even more important, the policy would provide a psychological boost to the economy."
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