Bush Budget: Rosy Economy, Slower Growth
By Mark Egan
Monday February 3, 10:35 am ET
WASHINGTON (Reuters) - The Bush administration's 2004 budget on Monday forecast halcyon days for the world's richest economy, predicting rapid economic expansion, falling unemployment and muted price rises for the next few years.
The budget forecast rosy days ahead for the now-floundering economy but pointed to lower economic growth this year of 2.9 percent compared to the 3.8 percent expansion the government forecast for 2003 in last year's publication of the budget.
The administration said the lower 2003 economic growth forecast was due to the economic recovery over the past year being less impressive than was originally expected.
But for the period running from 2004 through 2008, the Bush administration expects the economy to grow solidly. For 2004 it forecasts an economic expansion of 3.6 percent, 3.5 percent in 2005, 3.3 percent in 2006, 3.2 percent for 2007 and 3.1 percent in 2008. Unemployment is forecast to decline steadily until it reaches 5.1 percent in 2006. The document also sees consumer price increases moving modestly in a benign range of 2.1 percent and 2.3 percent each year for the coming five years.
The forecasts take no account of the possible impact that a potential war with Iraq might have on the economy. The $2.23 trillion budget revealed a dramatic fiscal deterioration with a record deficit of $304 billion for the current fiscal year as military spending rose and the impact of recent tax cuts were felt.
The budget said the weaker recovery at the current juncture was attributable to the stock market collapse, falling consumer and business confidence and weaker economic growth elsewhere in the global economy.
ABOVE POTENTIAL
Nevertheless, after a slower than expected recovery this year, the budget sees a strong economy in the coming years.
"During the next few years, real growth is projected to exceed the nation's long-term potential, which is estimated at 3.1 percent," the budget said. The largest contributions to growth in the near-term are expected to come from consumer spending and business fixed investment."
Wells Fargo Chief Economist Sung Won Sohn said the budget's economic assumptions are relatively conservative. But he said much of the economic outlook will depend on whether any war with Iraq is quick and decisive or long and drawn out.
"We should be able to see fairly robust economic growth for the foreseeable future, assuming the war against Iraq does not interfere," Sohn said. "The biggest concern in 2003 is the war against Iraq. A lot depends on how the war unfolds."
If the war were long and costly, like the war in Vietnam, the economic impact would be negative, but if the conflict were short like the Gulf War in 1991, then Sohn said the economy could see economic growth rates as high as 5-6 percent a year.
The budget assumes the Bush team's tax cuts will bolster after-tax incomes and therefore spending and that the elimination of taxes on dividends will boost the stock market and raise business investment.
The document concedes that economic growth may be higher or lower than forecast. On the upside, the latest stimulus package may cause stronger economic growth and if productivity gains of recent years continue the economy may also expand more rapidly. On the downside, the same forces that have held the economy back recently may persist and restrain economic growth.
U.S. government budgets typically paint an upbeat picture of the economy's performance in the coming years. In that regard, the document is little different from those seen during the years of the Clinton presidency.
But whereas the Clinton White House issued 10-year forecasts, the Bush team only forecasts for five years. Critics have said the new practice is to hide the negative fiscal impact that long-term tax cuts will have while the administration has maintained that projections beyond a five-year horizon are notoriously unreliable.
But perhaps the most dramatic change in recent years in the budget is the erosion in the nation's fiscal picture since a record surplus in 2000. The White House now expects deficits to total $1.084 trillion over the next five years. As recently as 2001, 10-year budget surpluses of $5.6 trillion were forecast.
In the short-term, that deficit helps boost economic activity. But, if the deficit were prolonged and the economy were to resume rapid growth, the result could be higher interest rates and slower economic growth than would be the case were the budget in balance. |
