WASHINGTON: As US President George W. Bush unveiled his plan to establish a base on the Moon to support a manned mission to Mars on Wednesday, economists were warning that the US "borrow and spend" policy that would fund the mission is piling up debt and inflating the country's deficits to serious levels.

"Just about everybody wondered how an administration that's busy building up deficits and debts could pretend to pay for this sort of gargantuan initiative," said a statement from the Washington-based Progressive Policy Institute on the space plan.

Early reports say the administration would ask for a five per cent annual increase in the 15-billion-dollar budget of NASA (the National Aeronautics and Space Administration) to support the Moon-to-Mars initiative.

In recent years, the US economy has routinely relied on foreign capital, via its capital account surpluses, to balance current account deficits. But hefty spending increases on security and war have ballooned expenditures and, along with huge tax cuts, created massive deficits. At 135.4 billion dollars in the third quarter of 2003, the US current account deficit represents roughly five per cent of gross domestic product (GDP).

In fiscal year 2000, the country boasted a surplus equal to 2.5 per cent of GDP, according to the International Monetary Fund (IMF). The large swing means that the United States now has the second-highest fiscal deficit among the group of seven (G7) most industrialized nations, says the IMF.

The prospect of an extended period of large US current account deficits coupled with large federal government budget deficits has recently rattled some economists. Last week Federal Reserve Board Governor Donald Kohn warned that foreign investors might become less inclined to finance the gap between "what we spend and what we produce", even if the US economy out performs others.

In a scathing report released last week, the IMF said US fiscal deficits could reduce savings at home and will ultimately push up real interest rates, both here and abroad, hampering private investment. Massive US debt could destabilize the value of the dollar and agitate international exchange rates, warns the IMF.

It estimates Washington could amass net external liabilities equal to about 40 per cent of GDP within a few years, "an unprecedented level of external debt for a large industrial country", according to the fund. High interest rates also could slow down private investments, which could in turn increase unemployment.

"From that perspective, the US situation is difficult," said Charles Collyns, deputy director of the IMF's western hemisphere department, in a teleconference last week.

Higher US fiscal deficits would mean no reduction of the federal debt, as previously envisaged, making the demands of an aging population on social security programmes like the public pension system and health care for the elderly even more difficult to finance.

"This will require determined action to reduce the federal deficit over the next 5 to 10 years," said Collyns. The large current account deficit also means the United States needs a continuous inflow of foreign financing, says the IMF, but that might not be as readily available as in the past.

"We feel there is a substantial risk that the foreign investors' appetite for US assets, and particularly US Government assets, will over time diminish," Collyns warned. "And we think, at least to some degree over the past year, this has occurred, and this is one of the reasons why there has been weakness in the US dollar." But US officials downplayed the threats, saying the economy is rebounding, and that they have ways to deal with the problems.

Federal Reserve Chairman Alan Greenspan said on Tuesday the deficit imbalances are "little" troubles. While the US dollar has fallen against other currencies, he said, inflation - the typical symptom of a weak currency - "appears quiescent".

On Wednesday the Federal Reserve said the nation's trade deficit shrank to 38 billion dollars, the lowest level in a year, as exports rose and imports fell. But Greenspan acknowledged that if the deficit continues to rise, "at some point in the future, further adjustments will be set in motion that will eventually slow and presumably reverse" foreign investors' demand for US debt.

On Wednesday the United Nations warned that rapid depreciation of the US dollar and an abrupt reversal of its trade deficit could hurt the recovering global economy.-Dawn/The Inter Press News Service.