Republican leaders to push for more tax cuts

? Just when the Federal Reserve is running out of room to lower interest rates to boost the sickly economy, President Bush and his Republican allies hope their bigger numbers in Congress will lead to expanded tax breaks for individuals and businesses.

The result is likely to be stronger growth next year but also soaring budget deficits that eventually could act as a drag on the economy by pushing interest rates higher.

Both Bush and Sen. Trent Lott, R-Miss., who will take over as Senate majority leader, let it be known this week that they will move ahead with economic stimulus packages to, as Bush put it, “make our economy stronger so people can find work.”

Private economists said there was no doubt that such an effort was needed given a string of recent statistics showing that the uncertain recovery from last year’s recession was in danger of stalling out. The jobless rate climbed to 5.7 percent last month and analysts are predicting it will top 6 percent by early next year.

“This economy is dragging along with little or no growth, and the Federal Reserve is close to running out of ammunition,” said Larry Chimerine, head of Radnor Consulting, an economic forecasting firm in Philadelphia.

The central bank cut interest rates by a bold half-point this week, but economists are worried that the reduction won’t have much impact, given that consumer and business rates have been at the lowest levels in four decades for almost a year now and consumers have exhausted much of their pent-up demand.

The administration and Republican leaders so far have not revealed much about just what types of tax cuts or possible spending increases will be in any new stimulus measure.

Lott, meeting with reporters this week, called the present tax code an “absolute abomination,” the same language Treasury Secretary Paul O’Neill has been using for months. O’Neill has been working to assemble a package of options to simplify the tax code.

However, most analysts don’t believe Bush will tackle such an ambitious agenda, at least right away, and instead will concentrate on smaller tax relief bills that have a chance of passing Congress quickly and putting money into people’s pockets next year.

Among the proposals being considered are advancing reductions in income taxes that were included in Bush’s $1.35 trillion, 10-year tax cut that won’t take effect until 2004. Such a change could provide billions of dollars in badly needed increased consumer spending next year.

Congress will also be petitioned by cash-strapped state governments to provide some relief for a $60 billion shortfall they are facing because of the economic slowdown. States must either cut spending or raise taxes to eliminate their deficits, moves that would be harmful to an economy struggling to emerge from recession.

Republicans’ top tax priority this year was to make permanent Bush’s big tax cut, which now expires in 2010. Lott and Sen. Chuck Grassley, R-Iowa, who will take over as head of the Senate Finance Committee, both said this week that this remained a top goal. But private economists questioned the wisdom of engaging in this battle given that Democrats remain opposed and such a change wouldn’t help the economy until 2011.

It would be far better, private economists said, for the White House and Congress to remain focused on providing a quick boost to the economy with increased spending to help states through their budget problems or in such areas as extending unemployment benefits for the 800,000 unemployed Americans who will exhaust their benefits at the end of the year.

In the tax cut area, economists urged consideration of short-term tax cuts to encourage businesses to boost investment spending but only if businesses spend the money next year.

Analysts said providing such short-term stimulus would concentrate relief in 2003, when the economy will need it most, and also limit the impact on government deficits. After four years of surpluses, the government recorded a $159 billion deficit last year, and the Congressional Budget Office predicts this year’s deficit will be $145 billion, an estimate that does not include any further stimulus proposals.

Economists are worried that unless Congress resists the temptation, spending increases and a bidding war on tax cuts will drive the deficit ever higher, meaning higher interest rates in coming years which will act as a drag on business investment.

“Any stimulus efforts that become permanent will lead to larger deficits down the road that will in all likelihood end up hurting the economy in the long term,” said Mark Zandi, chief economist at Economy.com.