U.S. Deficit May Reach $300 Bln in '03, Merrill Says
By Vivianne Rodrigues
New York, Jan. 8 (Bloomberg) -- President George W. Bush's plan to cut taxes over the next decade combined with a war in Iraq would cause the budget deficit to balloon to a record $300 billion this year, Merrill Lynch & Co. economists said.
Merrill, the U.S. biggest securities firm by capital, raised its budget deficit estimate from $225 billion after Bush yesterday proposed a $670 billion plan to boost the economy by cutting personal taxes, giving businesses more incentive to invest, and eliminating taxes on stock dividends. The U.S. recorded a budget deficit of $290 billion in 1992.
``With the increased spending and with the economy growing below potential the deficit will soar,'' said Kathleen Bostjancic, senior economist at Merrill Lynch.
Bush announced his plan after the U.S. economy slowed during the fourth quarter. The U.S. expanded at an average 1.5 percent annualized rate in last three months of the year, according to a Bloomberg News survey of economists. Third quarter U.S. growth was 4 percent, the government reported.
The economy will probably expand at a 2.7 percent pace this year and at a 3.6 percent rate in 2004, when the budget deficit should fall to $250 billion, Bostjancic said.
``Increase spending particularly on defense and homeland security, additional fiscal stimulus and still weak revenues will lift the deficit,'' Bostjancic said. Merrill estimated the cost of war at about $50 billion.
The Congressional Budget Office, which uses actual spending approved by Congress, in August forecast a $145 billion deficit for the current year, which began Oct. 1. Last year, the U.S. posted a $159 billion deficit.
Moody's Investors Service previously forecast the deficit at about $300 billion, and Barclay's Capital Inc. yesterday said the shortfall may reach $350 billion.
Morgan Stanley Chief U.S. Economist Richard Berner forecast the deficit will rise to $275 billion this fiscal year, $350 billion in 2004 and $275 billion in fiscal 2005. Those projections account for the costs of a ``brief war'' with Iraq, Berner said today on a conference call with other economists.
``Even those numbers compared to the rest of the economy are not as big as what we had at the peak of the budget deficits several years ago,'' Berner said. ``But nonetheless, they do raise the question of fiscal sustainability.''
Bear, Stearns & Co. economists including John Ryding said in a report today they are ``growing increasingly positive'' on the outlook for this year based on early economic data for December, gold and dollar prices, and the tax-cut plan. ``It is simply bad economics, in our opinion, to demonize the Bush tax-cut plan on the grounds that it will grow the deficit,'' they wrote.
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
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