Concerns grow over Bush's $674bn tax-cutting plan

The gushing welcome on the financial markets ahead of President George Bush's $674bn (£418bn) tax cut package fizzled out yesterday as concern grew over the long-term impact for the economy, the budget and the dollar.

After days of leaks Mr Bush unveiled a 10-year give-away budget that he said would cut the tax bill for 92 million Americans by an average of $1,100 this year.

The headline measure was the proposed abolition of the tax on dividends for shareholders but there were tax cuts and job grants for both individuals and businesses.

On Wall Street the Dow had jumped about 400 points, or 5 per cent, since rumours emerged but yesterday the blue-chip index was sold off as traders cashed in their profits.

Don Evans, the US Commerce Secretary, hailed the package – which was double the early rumours of a $300m package – as a boost for "growth and jobs" and some economist agreed there would be a short-term stimulus to America's faltering economy.

"The attempt to double up in the originally rumoured package reflects good short-term politics and possibly good short-term economics," Alan Ruskin, research director of 4cast in New York, said.

White House officials believe cutting dividend taxes could boost share prices by 10 per cent. Charles Schwab, chairman of the eponymous US brokerage, said the cut would "produce a generally positive effect on share prices and the economy".

But some economists believe the White House may be over-estimating the impact the cut will have on economic growth.

Stephen Lewis, chief economist at Monument Securities in London, said: "It is stretching the imagination to see the abolition of tax on dividends as the spur to investment that Mr Bush claims it will be.

"More obviously it boost the post-tax incomes of households that happen to hold shares ... whose propensity to spend is probably even lower than usual."

Whether or not the fiscal stimulus has the desired effect, it could well lead to a ballooning in the government deficit.

Mr Ruskin said the measure could turn forecasts of a cumulative surplus of $1,000bn by 2012 into a deficit. "The expanding budget deficit will in the long term act as a cap on growth that should be evident in the next few years," he said.

He added that, allied to a massive US current account deficit, this could undermine the dollar. "For the currency, the spectre of a serious twin deficit problem has become reality," he said. "Financing a public sector deficit patently driven by short-term political objectives is prone to act as a dead weight on the dollar for many years to come."

Economists fear overseas investors will no longer fund the estimated $2bn a day needed to finance the US deficit, triggering a collapse in the dollar. That would hit consumers' pockets as the cost of imports rose which in turn could force the Federal Reserve to hike mortgage rates to quell inflation.