http://www.guardian.co.uk/economicdispatch/story/0,12498,918085,00.html

America's $400bn war bill

The US is spending more on this war than it raises in taxes, paving the way for a nasty surprise for its taxpayers, writes Randeep Ramesh

Thursday March 20, 2003

War costs, but it is unclear who will pick up the tab. George Bush is not financing this campaign through taxation. Instead the president is cutting taxes - sending a welfare cheque to the wealthy - and raising military spending. The slowdown in the American economy has seen many states, who have to balance their budgets, cut back on social spending. The White House made it clear that there would be no federal bail out for these programmes. The president is reheating Reaganomics - cutting back on welfare, overcompensating with defence spending and offering big tax cuts to the rich at the expense of the poor.
Mr Bush's strategy is risky, if not reckless. A $1.5 trillion dollar tax cut over a decade is by anyone's estimation a large sum even before the cost of a war against Iraq and its aftermath are added onto it. Thoughtful Republicans like John McCain have asked for the cuts to be delayed until "the administration has a better understanding of the costs of war and peace."

In the last century, the cold war ended when the wall came down. In the new millennium, a hot one has begun. But the Soviet Union was a giant adversary. Iraq is a bomb-blasted state crippled by sanctions. Its military budget barely tops $1bn. America's, by contrast, is $400bn. As the Bush administration makes clear Saddam is just the start: Iran, North Korea are next and others will follow.

To finance the new wars, the White House is spending more than it collects in taxes. The result is budget deficits. More government debt will push up long term interest rates - which is bad for growth. Despite the Bush White House's unilateralism, America relies on the rest of the world to finance its deficits. The rest of the world was happy to do so when the US economy was strong, but investors' cash might go elsewhere if America no longer looks as if it is booming. America borrows hundreds of millions of dollars from the rest of the world each day to cover its savings gap. The Bush plan envisages an even bigger hole in the coming years, but will the rest of the world want to lend more and more cash, and if so at what cost?

The drip, drip of bad financial news and poor economic figures out of Wall St and Washington has already unsettled nerves. The internet bubble has burst and America's economy looks a little more ordinary again. Its hi-tech sector - once the country's biggest employer - now has fewer staff than the distinctly old-fashioned food products and transportation equipment manufacturing sectors. What if investors rush out of the dollar and dollar assets. The result is that the greenback weakens: it has already fallen by more than 10% in the past year. Exporters might like it, but a cheaper dollar will not see America return to trade surpluses. Instead it may fuel inflation - a worry in any war where oil is an issue.

Mr Bush will then be left with rising interest rates and more expensive imports. Should Mr Bush continue in office, he might end up like his father and start raising taxes to reassure capital markets that the US was acting to reduce its borrowings.

Seen in this context, the president's trillion dollar tax cut could end up as a political record: managing the greatest happiness possible for the smallest number of people. Perhaps worst is that the president's fiscal plan is a piece of bad politics masquerading as good economics. The administration aims to wage war and is buying more even arms for the most powerful fighting force the world has ever seen.

The increase in the defence department alone matches what the world spends on international aid every year. Ominously Mr Bush has pushed through the largest rises on weapons since Ronald Reagan faced down the Evil Empire of the Soviet Union in 1982. Then Washington had NATO and others willing to shoulder costs. In the last Gulf war, Kuwait, Saudi Arabia, Japan and Germany shared most of the $60bn costs of the conflict. This time the coalition of the willing does not have such large pockets. In fact the United States is trying to buy support with billion dollar sops.

In the end, the American public will end up paying for war. Unfortunately they have not been told how just large the bill could be.

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