KARACHI: The US budget for 2004, with a rising fiscal deficit and soaring debts, has focussed on economic recovery and security concerns to realize America’s global ambitions.
To quote President George Bush, the budget will meet challenges in three priority areas: winning the war against terrorism, ensuring homeland security and generating long-term growth.
The largest and most developed market economy, that has fuelled world growth in the 1990s, has been sluggish since the year 2000, carrying the risks of a prolonged recession.
And the miracle of last decade’s uninterrupted growth has given way to a cyclic crisis, shared in varying degrees with America’s European and Japanese trading partners, making recovery far more difficult.
Tax breaks and government spending are designed to shore up sagging businesses, encourage corporate investments and raise consumer incomes and spending that accounts for two-third of US economic growth. Consumer confidence, lowest since 1933, has been hit by the country’s sagging economic performance and the threat of a US-led war against Iraq.
The growing budget deficit is also explained by the enhanced spending on defence and homeland security, an outcome of the Bush doctrine or National Security Strategy aimed at further strengthening the world’s most powerful military establishment.
The Pentagon has proposed a 4.4 per cent increase ($16.9 billion) in current defence spending to $399 billion that is stipulated to go ultimately beyond $500 billion.
The Iraq war will cost anywhere between an estimated $55 billion to $120 billion, depending on whether it is a short or a long haul. Unlike the 1991 Gulf war, this time the entire burden of the possible war will be borne by Washington.
Similarly, President Bush has requested $41.3 billion for homeland security, up by 10 per cent from current expenditure.
Put together, the fiscal stimulus and the enhanced security spending will raise the federal budget deficit to $307 billion in fiscal year 2003. A 670-billion-dollar tax cut package is expected to push up the cumulative fiscal deficit for the next five years to $1 trillion.
A key issue facing the Americans is: Will the world be governed by a unipolar authority, the United States, or by a multilateral consensus with regional underpinnings? The acid test will be how to disarm Iraq if it has weapons of mass destruction (WMD), by war or by peaceful means.
As is evident, there are three basic ingredients of the Bush doctrine that other nations will find difficult to swallow: pre-emptive military strike, unilateral action, and the assertion that Washington will not tolerate any rival economic and military power. To persuade nations to unconditionally accept its leadership, the US is strengthening its military muscle. In doing so, it is making its defence industry prosper.
Does the US need a mighty war machine to defeat terrorists? The answer will be a definite no. The terrorists are armed civilians and the right approach to combat “terrorism” is to remove the root cause and to reinforce these efforts with intelligence and police action, enjoying popular support. Afghanistan has a lesson to offer.
The US war against the Taliban may have toppled a regime but its top leadership including Osama Bin Laden and Mulla Omar and their band of hardcore militants, have not only survived but are said to be regrouping to challenge the US. And the post-war situation in Afghanistan itself leaves much to be desired.
Yet another global dimension of the US budget is the unprecedented level of the federal debt that is anticipated to hit $6.4 trillion on or about February 20, breaching the earlier statutory $5.95 trillion limit. The consumers, the corporations and the government are all afflicted with heavy debts. And the net savings rate is only 1.6 per cent, the lowest in US history.
The current account deficit is at 5 per cent of the GDP, a source of worry for major trading partners. America is increasingly dependent on foreign money and will find it very difficult to lure foreigners to continue buying low-yielding US government papers, with declining interest incomes and depreciating dollar. The Fed interest rate at 1.25 per cent may be cut again soon.
Judging by the current account deficit, the dollar is over-valued. Investors in Europe and Japan have now reduced their holdings in the dollar-denominated assets. Faith in Corporate America has declined and stock prices have plummeted. There is also an outflow of money from the United States to the Middle East. If foreign capital inflows continue to decline, the US dollar will become still weaker.
The dollar is down by 13 per cent in trade-weighted global terms over the past year, though it has dropped by almost twice as much against the euro since its 2001 peak, says the Economist.
The US has declared that “free markets and free trade are key priorities of our national security strategy,” which, it says, must encompass every corner of the globe. But huge extra subsidies specially to rich farmers contradict the promise that Mr Bush has made to take a more market-oriented approach to agriculture.
The cost of subsidies will rise from $110bn to $180bn, and it has created tensions between the US and the EU, Canada, Australia and Brazil. Cotton and grain producers have been the main beneficiary ($40bn). Import duties on steel and wood have also evoked loud protests from the EU and Canada.
The agricultural subsidy in the US and Europe has deprived the poor farming nations of developed markets. Instead of opening up markets by withdrawing subsidies, the US budget proposes to increase by 25 per cent the funding for poor nations to a total of $1.5 billion on account of famine relief. It is just helping the poor survive with US doles and not making them prosperous.
Globalization is promoting social exclusion, when inclusion of the poor people and developing nations, holds the key to world’s economic and social progress.