By Greg Ip
Wall Street Journal
April 15, 2004
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Two international economic watchdogs warned that President Bush's budget plans will make the U.S. and other countries poorer in the long run, with one of them suggestinga variety of tax increases to tame the deficit. The International Monetary Fund said that the willingness of the U.S. to run a large deficit "provided important support" to the U.S. and world economic recoveries and so far hasn't pushed up long-term interest rates. But in the long run, it said, deficits will soak up limited savings, driving up interest rates and "crowding out" investment, thus slowing growth. Separately, the Paris-based Organization for Economic Cooperation and Development said taxes might have to rise to balance the budget. While Bush administration officials claim that would endanger the economy, the OECD disagreed: "The removal of fiscal stimulus no longer imperils the recovery." |
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The IMF warns the outcome could easily be much worse. It notes the Bush plan rests on "somewhat optimistic assumptions," including a rebound in tax revenue, no costs beyond this year for Iraq, extreme spending restraint, and no change to the Alternative Minimum Tax. The AMT is a tax system aimed at the affluent which, because it isn't indexed for inflation, will snare millions more families in coming years, wiping out the benefit of the Bush tax cuts.
If those assumptions are proved wrong and the budget deficit continued at current levels, U.S. GDP could be 2.7% lower by 2020 and 3.7% lower by 2050. World GDP would be 4.2% lower by 2050. The IMF added that for many poor countries, the effects could be even worse as they pay even higher interest rates to compete with the U.S. for the world's spare savings. Those that borrow in U.S. dollars would also find it costlier to pay off those debts as the inflow of foreign capital to finance the U.S. deficit initially pushes the dollar's value up.
Yesterday's report was the latest in a drumbeat of warnings from the IMF in recent years about the deteriorating U.S. budget picture. Like the others, it is likely to fall on deaf ears. The deficit ranks behind Iraq, terrorism and jobs in voter concerns this year, and neither President Bush nor his likely Democratic challenger John Kerry have put forth substantive proposals for balancing the budget.
The IMF predicted "significant benefits" from cutting the deficit faster than the administration now proposes, but doesn't specify whether it should be done through spending cuts or tax increases.
U.S. Treasury spokesman Tony Fratto said "we disagree" that the deficit should be reduced faster than the Administration now projects. "In the near term, America is ... not just dealing with the cyclical downturn but the war on terror. Dealing with the deficit over a reasonable period of time makes the most sense. That's the plan we have."
The OECD, an association of the world's rich countries, said in its annual report on the U.S. economy that Mr. Bush's tax cuts should boost growth by encouraging people to work and invest. But those benefits, it said, are likely to be wiped out as the deficit crowds out private investment. It suggested boosting revenue by ending tax breaks for mortgage interest, charitable donations and employer health-insurance premiums and closing down corporate tax shelters. It also suggested the U.S. encourage savings by implementing a national sales tax, or "value-added tax."
It argued that the Bush administration's proposed "Lifetime Savings Accounts" and "Retirement Savings Accounts" wouldn't boost savings, because only a handful of wealthy households already have reached the limits of existing tax-sheltered savings plans. But the plans would "lead to further substantial revenue losses."
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