An election campaign dominated by security concerns and cultural issues has done little to define President George W. Bush's agenda for the second term.

In his victory speech on Wednesday, he returned to two campaign themes: “We will reform our outdated tax code. We will strengthen Social Security for the next generation.” But the Bush campaign has been studiously vague on those policies.

At the same time, Mr Bush pledged during the campaign to halve the fiscal deficit over the next term and make permanent the tax cuts enacted during his first term and set to expire by 2011.

Economists, including those close to the administration, said the agenda for the second term was unclear.

Glenn Hubbard, dean of Columbia business school, and former chairman of Mr Bush's Council of Economic Advisers, said: “I am not sure that the economic policy priorities are entirely crystallised.”

He said the “A-list” issue included tax reform, Social Security reform and also efforts to improve the workings of healthcare markets but it would be hard to tackle fundamental reform of the tax code and of Social Security during one term.

Douglas Holtz-Eakin, director of the non-partisan Congressional Budget Office, speaking before Mr Bush's victory was confirmed, said that any incoming president would have to address the short-term costs of US military commitments and the war on terrorism, and the long-term costs of Social Security and Medicare.

Mr Bush's pledge to halve the fiscal deficit is based on strict control of discretionary spending a stiff challenge after the sharp increases in spending, even excluding defence and homeland security, over the past four years.

The CBO estimates the fiscal deficit at about 3.6 per cent of GDP in the fiscal year just ended. Independent economists have highlighted the big holes in Mr Bush's plan to halve the deficit, including the exclusion of the costs of Iraq.

The administration's 2006 budget, early next year, will provide the first concrete indication of how Mr Bush proposes to cut the deficit over the next four years and in particular how the stringent control on discretionary spending will be implemented.

Mr Bush will also have to address the Alternative Minimum Tax. The AMT was introduced 30 years ago to ensure higher earners did not avoid paying income tax through deductions and loopholes, but it was not indexed for inflation and has started to affect those lower down the income scale. Budget analysts estimate a fix for AMT is likely to cost more than $500bn (£270.4bn) over the next 10 years, relative to the CBO baseline.

William Gale and Peter Orszag, economists at the Brookings Institution, estimate that on more plausible assumptions than those the CBO has to adopt, the unified budget deficit is likely to average 3.5 per cent of GDP over the next 10 years including an AMT fix and making the Bush tax cuts permanent.

Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, said budget red ink would make it harder to compensate the inevitable losers as part of a wide-ranging tax reform, and to meet the short-term costs of Social Security reform.

The impact on the deficit of allowing younger workers to divert part of their payroll taxes into private accounts is likely to be run into the thousands of billions of dollars over 10 years. There is also a question of whether broad tax reform, including any shift towards a consumption-based tax, would be politically possible at the same time as tackling the thorny issue of Social Security reform even with Republican gains made in the House and the Senate.

Mr Hubbard said it was likely that Mr Bush's priority on tax reform would not be a broad change such as the introduction of a consumption tax, but would rather focus on proposals to tackle particular problems, including the AMT.

Reforming Medicare was not part of Mr Bush's election platform. Mr Hubbard said that efforts to reform health markets, including the expansion of Health Savings Accounts, could be seen as a first step towards Medicare reform.

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article

Comments

Comments have not been enabled for this article.