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Fri, Jan 10, 2003 - Page 12 News List

Bush move may raise borrowing costs

US ECONOMY The American president's tax-reduction initiative is likely to increase Washington's budget deficit and raise the cost of loans for individuals and companies

BLOOMBERG , WASHINGTON

President George W. Bush's call for a US$670 billion tax cut over the next decade revived a Reagan-era debate about whether lower taxes help the economy or hurt it by expanding the budget deficit.

In his plan to end taxes on dividends, give businesses more incentive to invest and accelerate income tax cuts, Bush said the role of government "is not to manage or control the economy from Washington."

The remarks echoed the 1980s supply-side theories President Ronald Reagan used to support his own tax cuts, allowing the budget deficit to reach 5 percent of the economy, compared with 1.5 percent for the 2002 budget year.

Democrats and economists said such a strategy would do little to boost the economy this year and would hurt it beyond this year by raising the budget deficit from last fiscal year's US$159 billion to a record US$300 billion or more. That may drive up borrowing costs for mortgages, cars and corporations.

"We have a very short memory," said Robert Reischauer, former director of the Congressional Budget Office. "Politicians really did pay a huge price in the actions they took in their efforts to reduce the large deficits we had."

Bush administration officials and some investors say the package would generate 2.1 million jobs, faster growth and more tax receipts by encouraging capital and stock investments.

"In periods when the economy is operating below potential it's appropriate to run deficits," said Richard Clarida, chief economist at the Treasury. "The key to providing the opportunity to get back to surpluses is to have a strong, growing economy."

The differences pave the way to a debate in Congress over whether to pass Bush's plan or adopt parts of a smaller package proposed by House Democrats. Bush will have to compromise with Democrats in the Senate, where Republicans hold 51 seats, shy of the 60 they need to avoid delays.

A swollen deficit forces the government to sell more debt, prompting other bond issuers to raise yields to attract buyers.

Some economists say that may lead to higher interest rates on mortgages and other consumer loans, as well as erase the increases in gross domestic product of 0.4 percent this year and 1 percent next year that the White House expects to generate.

The plan ``is going to create deficits -- deep deficits, out five and 10 years from now -- that are unmanageable for the economy,'' Senator Jon Corzine, a New Jersey Democrat and former chairman of Goldman, Sachs & Co, said in a Bloomberg Television interview yesterday.

The president is trying to prop up a US economy that probably grew at an annual rate of 1.5 percent in the final three months of last year, the median of 71 forecasts in a Bloomberg News survey last month. That's about a third of the average 4 percent annual growth rate of 1996-2000, and the slowdown is partly to blame for the UUS$159 billion deficit in fiscal 2002 after four years of surpluses.

While the Congressional Budget Office in August forecast a US$145 billion deficit for the year that started Oct. 1, private forecasts by Barclay's Capital and Moody's Investors Service put the deficit at $300 billion or more. They include the cost of a war with Iraq, which White House estimates at about the same as the US$61 billion spent on the 1991 Persian Gulf conflict.

Merrill Lynch & Co, the biggest security firm by capital, today increased its budget deficit estimate to US$300 billion next year from a previous forecast of US$225 billion, citing Bush's proposal as reason for the revision.

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