Bush tax cuts may hit confidence, say bankers

The Bush tax cuts risk undermining confidence in the health of US public finances, according to the Bank for International Settlements (BIS), the forum for the world's central banks.

The BIS said in its annual report that the Bush administration and the US Federal Reserve had been right to take action to boost the economy.

But it said the $350 billion (€306 billion) tax-cuts package agreed by Congress had "not been helpful" and there was a danger that debt would reach unsustainable levels.

The BIS warned that the US risked exacerbating imbalances in the US economy which could result in a painful correction in the future. The Fed may have contributed to new imbalances, the report suggests, by fuelling a rise in house prices with its steep interest rate cuts which have led to a further build-up of debt.

The sharp reversal in US government finances has become a growing source of concern. The latest official forecast for 2003 is for a deficit of more than $400 billion, compared with a budget surplus of $236 billion in 2000.

The BIS urges the US to adopt a system to guarantee the sustainability of government debt, along the lines of the euro-zone's stability and growth pact - although it criticises the pact as too inflexible.

In spite of the steep fall in the dollar over the past year, the BIS said the US currency was not out of danger and the size of the current account deficit would continue to weigh on it. - (Financial Times Service)