George Bush, it might be thought, had enough on his plate with Iraq, North Korea and the war on terrorism. Right now, however, his focus is totally domestic, as he unveils the second great economic package of his presidency. The aim is to rekindle growth, to reduce unemployment – and to ensure he will not be thrown out of a job when he comes up for re-election 22 months hence.
The proposals Mr Bush is setting out in a speech in Chicago today are likely to be worth $600bn (£374bn) over the next 10 years. They are a classic dose of Republican party economic medicine, aimed at investors and the anaemic stock market but billed as generating benefits for all.
Their centrepiece will be the total abolition of the taxes on dividends, representing a tax cut of $300bn over a decade. There will be smaller goodies for companies, and perhaps extra depreciation allowances. Individual income tax payers can look forward to an acceleration of rebates currently due to take effect between 2004 and 2006 under the $1,300bn income tax cut package approved in 2001.
To counter Democrats' charges that Republicans only think of the rich, Mr Bush will also announce an extension of unemployment benefits, tax breaks in favour of two income families, and an increase in tax credits for childcare. There will also be federal aid for the states, many of which face unprecedented budget deficits.
Economists are already arguing over the likely effect (or lack of it) of the new measures, or whatever survives of them after Congressional wrangling.
One thing however cannot be denied. The package reeks politics – from its timing on the day the new Republican-controlled 108th Congress meets for the first time, to its overriding goal of tackling the issue on which Mr Bush is most vulnerable as he gears up for the 2004 campaign: the parlous state of the economy.
Not even this President's continuing popularity can obscure the truth that since he took office, 1.5 million jobs have been lost, unemployment is close to a nine-year high, and the Dow has dropped nearly 20 per cent, in the worst bear market in a quarter century. Barring military catastrophe in Iraq, the Democrats' best hope of recapturing the White House lies in continuing economic weakness, and the party is already taking aim.
"The wrong idea at the wrong time to help the wrong people," was the verdict of Tom Daschle, the Senate Democratic leader (and likely 2004 presidential candidate), even before Mr Bush opened his mouth in the Windy City. In short, a fierce political battle lies ahead.
The White House will have to make concessions, to win over moderate Democrats, and rebut the criticism that it is pandering to the best-off. Mr Bush dismisses such "class warfare." But the fact that the size of the package, as leaked by officials, doubled over the weekend from $300bn to $600bn suggests he is pitching his opening bid deliberately high – in order to obtain a compromise outcome in line with what he wanted at the outset.
The economic impact is thus hard to gauge. If something along the lines of Mr Bush's Chicago speech makes it to the statute book, Bush administration supply-siders insist the scrapping of the dividend tax will work wonders. They expect a boost of 10 per cent or more in share prices (making the 50 per cent of Americans who own stocks feel richer at a stroke).
Consumer spending will rebound, they claim; growth will surge, and the ensuing higher tax revenue will even take care of that pesky federal deficit.
And even it does not, Republican economists say there is no cause to worry – after all, have not short-term interest rates declined to a 40-year low, despite the disappearance of the Clinton era surpluses? But others disagree, arguing that the return of federal deficits has meant longer-term rates have fallen considerably less than they otherwise would have done. Nor, they maintain, will the stimulus be significant. $60bn a year may sound a lot, but it represents less than 0.6 per cent of America's GDP.
Indisputably however, the new package will worsen the federal deficit. Fiscal 2002 produced a deficit of $159bn (compared with a $127bn surplus in 2001). A similar deficit was on the cards for this year; the new measures could increase it to $200bn or $250bn – without taking into account the extra cost of homeland security and a protracted war over Iraq. Iraq indeed is the wild card in any assessment of US economic prospects.
Growth last year may have been 2.5 per cent, but probably dwindled to an annualised 1 per cent in the final quarter. The expectation is for slightly faster growth in 2003. A speedy and successful war to topple Saddam Hussein (or no war at all) would lift business and consumer confidence and lower oil prices – and, according to some economists, see growth rattling along at 4 per cent or so by year's end. But if the opposite happens, all bets are off. The economy would be in a predicament that no abolition of dividend taxes could ever resolve.
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