Opinions differ over importance of US's spiralling budget deficit

 

Calls for a war tax coincide with growing criticism of the Obama administration’s economic policies, writes LARA MARLOWEin Washington

THE US’s $12 trillion (€8 trillion) budget deficit is an increasingly explosive issue.

Yesterday alone, a powerful congressman demanded a “war surtax” on troops sent to Afghanistan, a video mocking US president Barack Obama’s economic policies was repeatedly broadcast, and the New York Times made dire predictions of a government payment crisis.

Obama is expected to announce his decision on a troop increase as early as November 30th.

David Obey, the Democratic chairman of the House appropriations committee, yesterday told ABC News that sending more troops would be a mistake that could “wipe out every initiative we have to rebuild our own economy”.

Obey said 40,000 more troops requested by Gen Stanley McChrystal, the US commander in Afghanistan, would bring the cost of the war to $90 billion annually, or $900 billion over 10 years – equivalent to the cost of healthcare reform.

“There ain’t going to be no money for nothing if we pour it all into Afghanistan,” Mr Obey said. “If they ask for an increased troop commitment in Afghanistan, I am going to ask them to pay for it.”

He advocates a “war surtax” of 1 to 5 per cent on US taxpayers.

The chairman of the Senate armed services committee, Carl Levin, has called for a tax on Americans earning more than $200,000 to pay for additional troops.

Calls for a war tax coincide with growing criticism of the Obama administration’s economic policies.

In a repeatedly broadcast skit from the popular Saturday Night Live television programme, an actor playing the Chinese president, Hu Jintao, asks Mr Obama if he will pay the $800 billion the US owes China.

“As I listen to you, I am noticing that each of your plans to save money involves spending even more money,” the Hu character says through an interpreter.

Mr Obama’s supporters blame the mushrooming deficit on the Bush administration, which sent the country to war in Iraq while at the same time reducing taxes.

The Iraq war has cost $3 trillion, or one-quarter of the deficit. But government spending continues to grow; it has almost doubled in the past two years.

A frontpage story in yesterday’s New York Times predicted darkly that “the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages”.

Interest payments are manageable at the moment because interest rates are near zero. However, rates are likely to increase in 2010, and by 2019 the government’s interest payments will rise from $202 billion at present to more than $700 billion a year, according to White House estimates.

The $500 billion increase surpasses the budgets for the Iraq and Afghan wars, and the departments of education, energy and homeland security combined.

But writing on the opinion page of the same newspaper, Paul Krugman, the Nobel laureate for economics, seemed to contradict the New York Times’s alarmist article.

Fears of interest rate hikes are exaggerated, Mr Krugman says.

He accuses Mr Obama of being “intimidated by scare stories from Wall Street” and “getting his views, directly or indirectly, from Wall Street”.

The threat to recovery stems from too little government spending, not too much, says Mr Krugman. Mr Obama should concentrate on job creation, not deficit reduction.

There seem to be two separate economies in the US: Wall Street, where the leading banks are dispensing $30 billion in bonuses this year; and Main Street, where 10.2 per cent of Americans are unemployed.

Mr Obama is sometimes criticised for focusing on healthcare reform when jobs are the leading concern of most Americans. Yet the two go together; Americans lose their health insurance when they lose their jobs.