Senate slashes President Bush's $726bn tax-cut package in half

The US Senate last night dealt a major blow to President George Bush's economic recovery plans by voting to slash his proposed $726bn (£461bn) tax cut package to just $350bn.

The vote is a big victory for Democrats, who have argued from the moment Mr Bush announced his plan in January that it made no sense at a time when the federal deficit had hit record levels and the country faced massive bills for war in Iraq.

Along with many economists, Democrats also say that the plan, with its focus on the abolition of investor taxes on dividends, will do next to nothing to stimulate the economy in the short term, as the US faces a possible double- dip recession.

The rare defeat for the administration in the Republican-controlled Senate came on the day the White House asked Capitol Hill to approve an emergency $75bn to fund the Iraq war and its aftermath for an initial six-month period.

Administration officials last night vowed to seek to reverse the decision in a new vote on the 2004 budget later. There is also room for compromise when the Senate seeks to reconcile its budget legislation with the House of Representatives, which approved the $726bn package in full. But yesterday's defeat is a further sign of Congressional unease at the runaway federal deficit, now forecast at a record $400bn or more for fiscal 2003.

The Senate defeat tempered gains on Wall Street yesterday. The Dow Jones index, which jumped 123 points in afternoon trade amid reports of an uprising in Basra, reined in its advance to end at 8280.2, up 65.6 points.

Stock markets had fallen earlier in the day after it emerged that confidence among American consumers fell this month to a 10-year low. The US Conference Board said its consumer confidence index fell to 62.5 in March. It was the fourth successive monthly drop.

But analysts noted that the cut-off date for the survey was 18 March, the day before the US began its attack on Iraq. Alan Ruskin at 4CAST said: "Future developments in confidence will clearly depend on future developments in Iraq, which few can now confidently predict."

Meanwhile, financial regulators from the Group of Seven nations yesterday pledged to intervene to boost world economic growth if the end of the war failed to spur a rebound. The Financial Stability Forum's promise – a veiled reference to further cuts in interest rates and taxes – will be seen as an attempt to reassure the increasingly volatile markets.

Andrew Crockett, the FSF chairman, said the Iraq conflict was one of the largest threats to arecovery. "Nevertheless, the central scenario remains that once uncertainties are removed, there will be a gradual pick-up in economic activity," he said.