Yahoo! News - Presidential winner faces 'twin deficits' battle

Yahoo! News - Presidential winner faces 'twin deficits' battle: "Presidential winner faces 'twin deficits' battle

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WASHINGTON (AFP) - Whoever wins the November 2 presidential election will inherit massive budget and trade deficits that pose huge economic challenges that will give little relief for President George W. Bush (news - web sites) or rival John Kerry (news - web sites).

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Washington has gone from a federal budget surplus of 236 billion dollars in 2000 to an estimated deficit of 422 billion dollars for the fiscal year that ended September 30.

Moreover, in the area of trade and investment, the United States had a deficit of 166.2 billion dollars in the second quarter in the current account deficit, the broadest measure of trade and investment flows.

The twin deficits are telling the United States that it is consuming more than it is producing, and requiring foreign investors to fill the gap with capital.

But many economists say this is unsustainable and will further weaken the dollar, erode US living standards and destabilize the global economy.

Both candidates claim they will halve the deficit, but economists are skeptical.

'Both presidential candidates have made lofty promises with respect to deficit reduction, tax cuts, and expanded health care coverage. However, it would take a great deal of luck and skill for either candidate to deliver on all these promises,' said Lehman Brothers economist Joseph Abate.

Abate noted that Kerry, who proposes to raise taxes on households earning more than 200,000 dollars per year while expanding tax releief to others and boosting health care credits, could increase the deficit.

But he said the Bush plan to make permanent the recent tax breaks enacted by Congress would be an even bigger fiscal drain.

According to congressional estimates, he said the cost of the full Bush package would exceed 2.2 trillion dollars over the next decade while Kerry's plan would likely increase debt by 1.1 trillion dollars over the same period.

'Neither candidate could reasonably be called a model of fiscal prudence,' Abate said.

'Given the size of these estimates, neither candidate, despite talk of fiscal propriety, is likely to succeed in halving the budget deficit by 2009. Instead, over the next decade, these plans are likely to swell the Federal debt by between 30 and 50 percent.'

Some analysts see a future in which a debt-crippled Washington crowds out the credit markets, leading to higher US interest rates and a weaker dollar that roils the global economy. But that has not been a campaign topic.

'This subject isn't going to be discussed honestly in an election. Bush and Kerry want to talk about what they're going to give people,' said Peter Peterson, a former commerce secretary who heads the Concord Coalition, a group advocating balanced budgets.

'When this country consumes more than it produces, government drains our very limited national savings.'

Stephen Roach, chief economist at Morgan Stanley said the United States has gone from being the world's biggest creditor two decades ago to the world's biggest debtor, and is squandering the money it is borrowing.

'America is no longer using surplus foreign saving to support 'good' growth,' he said.



'Instead, it is currently absorbing about 80 percent of the world's surplus saving in order to finance open-ended government budget deficits and the excess spending of American consumers.'

Sung Won Sohn, chief exonomist at Wells Fargo Bank, said the United States is likely to muddle through the deficits, but will pay through lower living standards and higher interest rates.

'We borrow 1.8 billion dollars every single day from overseas in order to offset the current-account deficit,' Sohn said.

'The US will be able to raise enough money to fund the deficits. The issue is the source of funding and the price.

'The US will rely increasingly on less stable sources of funding and pay higher interest rates. It is a fait accompli that the dollar will depreciate further. The dollar depreciation will lead to higher inflation and interest rates, hurting the economy, including housing.

'If not corrected, our children might have to devote an increasing portion of their work day to pay interest, dividends and rents to foreign investors.'"