Special report: George Bush's America
Heather Stewart and Jane Martinson in New York Wednesday August 1, 2001 The Guardian
President Bush's $38bn (£26bn) tax rebate will force US government finances into the red, the US treasury admitted yesterday.
In a u-turn from its previous forecast of a $57bn surplus, the treasury now expects public finances to show a $51bn deficit over the next three months, as the combined effects of the rebate and the slowdown in the economy bite into Washington's revenues.
Treasury officials insisted the swing into deficit was a short-term cashflow crunch. "We made a decision to implement an immediate economic stimulus through tax cuts. These numbers simply reflect those changes," said Tony Fratto, a treasury spokesman.
The news failed to dampen Washington's determinedly upbeat view of the economy's prospects. Karen Hendershot, the treasury's acting director of macroeconomic analysis, said that the fillip to public spending from the tax rebate should add a full 1% to US GDP growth by the end of the year.
"While we cannot dismiss the uncertainties about the progression of recovery in the business sector, it seems plausible that the worst of the slowdown may be behind us," Ms Hendershot said.
The US public are continuing to shop at a healthy rate in the face of the economic slowdown, according to official figures. Consumer spending increased by a larger than expected 0.4% in June, the commerce department said yesterday, up from 0.3% growth in May.
However, a drop in consumer confidence raised fears that the public will not continue to steer the economy clear of recession by spending their tax rebates, as the treasury is hoping.
The confidence barometer published yesterday by independent researcher the Conference Board, fell to 116.5 from 118.9 in June.
Almost 100m US taxpayers are set to receive an average of $300 each by the end of September, as part of a package of tax cuts worth $1.3 trillion over the next 10 years.
A two-week delay in the payment date for corporate taxes from mid-September, enacted after the budget estimates were made, accounts for $28bn of the unexpected public deficit, by pushing receipts into the next US fiscal year, which begins on October 1. "This particular exercise in smoke and mirrors will cost the treasury more than $40m in lost interest income," Louis Crandall, chief economist at financial analyst RH Wrightson & Associates said of the measure.
Mitchell Daniels, the administration's budget chief, expects a surplus of between $160bn and $190bn by October, but the bulk of this - some $150bn - is the politically untouchable social security budget. The congressional budget watchdog had previously forecast a surplus of $275bn for this year.
Joshua Feinman, chief economist at Deutsche Asset Management in New York, said: "I don't think it's the end of the big budget surplus, but we've certainly seen the peak."