The United States' ballooning government deficit is "worrisome" and could undermine Wall Street's confidence in the Bush administration unless it is tackled, US treasury secretary John Snow warned yesterday.
He said the White House was determined to bring down the deficit, which will hit a record $455bn (£286bn), or 4.2 per cent of GDP, this year and is forecast to hit a peak of 6 per cent.
Mr Snow said a strong economic recovery, which would see growth of more than 4 per cent next year, would boost tax revenues. He told reporters during a four-day tour of Britain and Europe that the projected shortfall was "larger than it should be".
"It is manageable and it is not something that is alarming but it is worrisome," he said. "We need to be firm in saying it is unwelcome and we don't like it and that in both relative and absolute terms we are committed to bringing it down."
The Republican administration has overseen a massive shift in public finances. The reversal from Clinton surpluses to spiralling Bush deficits is the largest, as a share of the economy, for exactly half a century. The issue threatens to be an Achilles' heel for the administration, as a runaway deficit would undermine financial markets' confidence in the government and, in turn, the dollar.
Mr Snow addressed this issue head-on yesterday. "I have always said that deficits matter and we never want the financial markets to perceive government policy as indifferent to deficits."
He said markets were right to be concerned that a ballooning deficit meant private capital would be "crowded out", which in turn would harm the long-term productive capacity of the economy.
The US treasury secretary likewise gave cautious approval to French proposals to relax the terms of the stability and growth pact that forces eurozone countries with deficits of more than 3 per cent of GDP to cut spending in the face of a downturn.
Last week President Chirac, who is in breach of the pact, called for a temporary suspension to allow states to cut taxes and raise spending to avert recession. Mr Snow said: "I am not saying that the 3 per cent rule is an inhibitor to growth but the fact that the president of France is saying 'let's have a look at it' is probably a healthy thing."
A panel of economists commissioned by Romano Prodi, the EU president, is today expected to call for an easing of the exceptional circumstances under which a country would be allowed to breach the limit.
On the US economy, Mr Snow reiterated Treasury forecasts of growth of more than 3 per cent in the final two quarters of this year and more than 4 per cent in 2004. He dismissed sceptics within the business community and economists who focused on the stagnant state of the US labour market.
He said firms were in a strong position to take advantage of the upturn but warned that unemployment would continue to rise before falling as the recovery kicked in.
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