- America is a country living beyond its means. That simple
truth places a giant question mark on the radical agenda George Bush has
set out for his second term.
- It features the part privatisation of social security,
major changes in the US tax code, and moves to make permanent the massive
"temporary" tax cuts of his first term. The only problem is that
the US is in no position to pay for them.
- The measure that would define the Bush domestic legacy
would be an overhaul of a social security system whose origins go back
to Franklin Roosevelt. Mr Bush wants to allow workers to invest part of
the contribution that now goes to the government into new tax-free
would cost the system between $1trn and $2trn.
- Few would argue there is a pressing need for an overhaul
of the US tax system which is grossly overcomplicated and riddled with
special interest loopholes.A simplification, however, would be part of
Mr Bush's wider agenda of lowering taxes for the well-paid. The President
wants to move towards what critics say is a more regressive system,
the tax burden from income to spending.
- The third item on the agenda sounds innocuous enough
- a removal of the "sunset clauses" which have imposed
time limits on some of the $2trn of tax cutssince Mr Bush took office in
2001. This accounting device has enabled the administration to claim that
the federal budget deficit will decline later in the decade. With this
measure, that will no longer be possible. One way or another, the federal
budget deficit will increase, if nothing is done.
- The US is saddled with a record budget deficit of $413bn
(£223bn) and a trade deficit running at $600bn (£326bn). On
one thing the experts agree. This cannot go on for ever.
- The Bush administration has cut taxes but has boosted
spending at the fastest rate since Lyndon Johnson's "Great
era. The President has yet to veto a single spending bill sent him by
- Thus far he, and the US, have got away with it. A
of surging productivity, low commodity prices and cheap imports has kept
inflation and interest rates low. Taxes have been falling and, thanks to
low interest rates, debt has been cheap. As a result, the American consumer
has kept spending. The result has been a solid recovery from the 2000/2001
recession, and a respectable growth rate of 3.5 per cent or more. But the
recovery is financed by borrowing, mostly from abroad, and the bills may
be about to come in. Productivity is slowing, the price of oil is soaring
and other commodity prices are also climbing.
- The US gets away with both deficits thanks to the
of foreigners to hold dollars despite low interest rates. The nightmare
of the Federal Reserve is that foreign investors and central banks will
stop buying US stocks and government securities.
- If that happened - and there even are signs the process
may have started - the Fed would be forced to raise interest rates more
quickly, pushing up the cost of consumer borrowing and mortgages. The US
property bubble might burst. Growth would then stall, and unemployment
- And there is an even deeper structural problem. In a
few years, the first baby-boomers will retire, placing a huge strain on
pensions, welfare and the like - paid out of social security.
- If the the system is to stay solvent, even without
either taxes must rise or benefits be cut. This is the sort of choice that
Mr Bush or any other politician hates to make.
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