The Bush administration’s reform agenda for its second term of office is largely in place. A sweeping reform of the pension system is already lined up for this year. This is meant to re-channel between one and four percentage points away from the pay-as-you-go system towards private provision. A blueprint for reform should be ready by July. This is likely to go well beyond the formula “low rates – broad assessment base”. The tax reform is aimed at offering tax support to savings and investment in particular.
USA: Bush administration: Far-reaching reform plans and higher debt
According to a report by the economists at Allinz Group/Dresdner Bank, both reforms will call for a rejigging of funds in the US budget on a major scale. If the simultaneous target of halving the budget deficit is to be achieved by 2008, 3.7 percentage points of GDP would need to be rejigged in the federal budget under the most expensive option – whether this be spending cuts, higher tax rates or a broader tax base. Even the most favorable option would still require no less than 1.9 percentage points. The austerity budget in the first Clinton administration (1993/94), already regarded as sweeping, made do with a mix of tax hikes and spending cuts in the region of 1.1 percentage points. The Bush administration thus runs the risk of piling up yet more debt in this term of office instead of fully exploiting the cyclical consolidation.
David F. Milleker
Tel.: +49.69.2 63 – 1 13 48
E-Mail: david.milleker@dresdner-bank.com