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Much of World Skeptical of Bush's Budget
G-7 Partners to Hear Administration's Defense
By Jonathan Weisman and Paul Blustein
Washington Post Staff Writers
Friday, February 6, 2004; Page E01
As the finance ministers of the world's seven largest industrial countries converge today on Florida, Treasury Secretary John W. Snow will try to counter criticism of President Bush's fiscal policies with a pledge to cut the budget deficit by half in five years, administration officials say.
But international currency traders and investors -- the audience most eagerly awaiting the results of the Group of Seven's meeting in Boca Raton -- already question the administration's credibility. In ways large and small, they say, the 2005 budget that Bush proposed Monday has only exacerbated their concerns by employing gimmicks and omissions to mask the scope of the government's fiscal problems.
The United States borrows $1.5 billion a day to run the government, much of it from foreign lenders.
"The government's credibility is extremely important, and I assume therefore, so is the president's, especially considering how much of the debt is being financed by foreign capital," said Edward McKelvey, a senior economist at the investment banking firm Goldman Sachs. "There's been an element of realization that this is a gigantic problem for the U.S., and certainly when you talk to investors, this is on their minds."
John B. Taylor, undersecretary of the Treasury for international affairs, largely dismissed concerns about the administration's response to the growing deficit when he briefed reporters this week on the G-7 meeting. Asked how U.S. officials will respond to questions about the credibility of the administration's fiscal plan, Taylor replied: "With the hard facts."
Bush's plan "is a good solid budget," he said, based on "conservative" and "reasonable" economic assumptions. The G-7 meeting would focus on an "agenda for growth," he said, and Washington will defend its budget -- including a deficit projected to hit $521 billion this year -- as an engine for world economic recovery.
Snow will stress Bush's plan to cut the deficit significantly over five years, aides said. The White House projects that this year's $521 billion deficit will fall steadily to $237 billion by 2006, the final year of the administration's forecast. White House budget director Joshua B. Bolten said he believed that the deficit would continue to fall after that.
"I don't believe too many people believe those numbers will work out," said Sung Won Sohn, chief economist at Wells Fargo Bank. "The risk is that deficits will get larger, not smaller."
The administration's $364 billion deficit forecast for fiscal 2005, which begins in October, assumes that no money will be spent next year in Iraq and Afghanistan, even though Bolten conceded that Bush will seek up to $50 billion this fall to cover those costs.
The White House's entire five-year budget includes no money at all for the ongoing wars in Afghanistan, Iraq and against terrorism in general, but it does assume the extension of the president's tax cuts.
"We're trying to finance three separate wars with three tax cuts: the war on terrorism, the war in Iraq and the war in Afghanistan," Rep. Rahm Emanuel (D-Ill.) told Bolten at a House Budget Committee hearing this week. "What we have here, in my view, is not just a fiscal deficit, but a credibility deficit."
The budget also includes no long-term solution to the growing problem of the alternative minimum tax, a parallel income tax system designed to ensure that the affluent pay taxes but which is increasingly ensnaring the middle class. A full fix would cost hundreds of billions of dollars. Instead, the budget included a temporary "patch" through 2006 costing $23.8 billion.
A senior economist for a multi-lateral lending organization, speaking on condition of anonymity, interpreted such flagrant omissions as signals to international lenders that they should not take an election-year budget seriously. Instead, he said, the budget signals that lenders and investors should wait another year to see Bush's deficit-reduction plan.
The budget calls on Congress to allocate $70.1 billion for tax credits to help the uninsured purchase health insurance, but does not suggest how to pay for it. "When the Congress moves legislation to implement the President's health care credit proposal, the Administration will work with the Congress to offset this additional spending," the budget says.
Ashraf Laidi, chief currency analyst at MG Financial Group in New York, questioned how Bush could ask Congress to eliminate dozens of domestic programs while he contemplates -- but does not fully fund -- a trip to Mars.
"Sixty-five spending programs are supposed to be cut when they're deemed wasteful, but we're supposed to be spending so much to see what's going on on a different planet?" Laidi said. "That really hurts credibility."
The budget does include making the president's tax cuts permanent, but only through 2009, at a cost of $148 billion. Most of the tax cuts do not lapse until 2011. Treasury Department documents indicate that if all the tax cuts of 2001 and 2003 were extended through 2014, the cost would jump to $990 billion.
"If you project out only five years, things don't look so bad," said Michael Mussa, an economist in the Reagan administration and the former chief economist at the International Monetary Fund. "The problem is that the demographics of Social Security and Medicare start to get much worse after 2010. So unless you can get incredible and unrealistic restraint on the growth of spending, there's just not enough revenue."
In fact, the administration has limited any deficit reduction to a tiny slice of the budget, exempting from cuts Social Security, Medicare, defense, homeland security and overall education spending, said Henry Willmore, chief U.S. economist at the British investment bank Barclays Capital.
"That makes the squeeze on everything else implausibly large," he said.
If defense, homeland security and international assistance were not counted, spending on domestic programs at Congress's discretion would actually fall by $1 billion to $382 billion in 2005 in the budget, and would have to keep falling to meet the White House's targets, said Thomas S. Kahn, Democratic staff director of the House Budget Committee. Adjusted for inflation, the budget envisions spending $50 billion less on domestic programs in 2009 than it did in 2004, the Center on Budget and Policy Priorities said.
Some lending institutions are simply dismissing the White House's calculations and adopting their own. Willmore said Barclays will assume a structural budget deficit of $300 billion in a strong economic climate, and rising from there during slowdowns.
Goldman Sachs assumes an accumulation of $5.5 trillion in federal debt over the next decade, with the deficit averaging $550 billion a year.
So far, White House pronouncements have had little effect on the international finance markets. McKelvey said concerns over the deficit are not new. They have contributed to the dollar's steady decline against European currencies for the past two years and contributed to an increase in long-term interest rates last summer. Willmore and some other international economists say the markets are cutting Bush some slack in an election year, with an understanding that deep spending cuts or tax increases are unrealistic now.
"For now, the market is giving Bush the benefit of the doubt, but they will look at this very closely after the election," Willmore said. "If nothing is done in the first quarter [of 2005], then you'll see a much more dramatic reaction."
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