President Bush will Increase Budget Allocation for Defense and National Security

by Nino Arveladze

President Bush presented a draft of the federal budget the priority of which is given to defense, national security and scientific research activities. Introduction of new taxes is envisaged in it.

The President will try to convince the Congress of the necessity to approve his plans. In all, Mr. Bush plans to spend 2.77 trillion USD in 2007 fiscal year and says that he envisages allocation of 50 billion USD for Iraq and Afghanistan, which makes up 20.1% of the GDP. The President expects that incomes will increase due to the new Tax Code and believes that the total revenue will reach 2.42 trillion USD, which will make up 17.6% of the GDP.
If the Congress adopts Mr. Bush’s proposals the deficit will decrease to 354 billion USD but, as it is expected, the Congress will not share the President’s opinion. This year’s expected deficit makes up about 423 billion USD, that is 3.2% of the GDP.
Next year public security expenditure will reach 581 billion USD. 592 billion USD is envisaged for medical care and medical insurance to invalids, old and poor people.
Strengthened frontier guard
2007 budget envisages an intensive defense program. Billions of dollars are intended for extermination of insurgents and financing of the arms program. The increase is stipulated by the wars in Iraq and Afghanistan and the program of modernization of heavy armaments. The sum allocated for the purpose of the country’s security envisages the government’s priority in the fight against terrorism. The budget also provides for strengthening of the frontier guard, which has to do with the debates concerning immigration.
Mr. Bush requires increasing of financing of the National Scientific Fund. In 2007 fiscal year the fund’s financing will be increased by 7.9%, which will be the first step in making of investments in science. Mr. Bush says that the objective of the US is to be the leader in the sphere of technologies, especially when rivals in Asia and other regions have already appeared. The initiative also envisages intensified studying of mathematics and science in schools with the purpose of training of skilled workers for jobs related to advanced technology. The President shows a great interest to alternative fuel technologies.
In the two-page introduction to the budget Mr. Bush writes: “The top priority of my administration is protection of our citizens and motherland”. As to other domestic expenditures, he emphasized his wish – the budgetary process should be characterized by utter responsibility and transparency, and the expenditures should be reduced sharply.
The President says that financing of some domestic programs will be reduced, instead other programs will be worked out, like the program of additional nutrition, a program that costs 111 million USD a year that envisages making of parcels consisting of cheese, groats, peanut oil, and other food products. They will be intended for 400 000 old people with low incomes. The financing of some programs will be increased. For instance, 2 billon USD will be allocated to citizens with low incomes that are unable to pay for heating of their houses. The allocated sum does not greatly differ from the sum envisaged in the 2006 program, though house heating costs 31% more in comparison with the previous year, which is naturally related to rising in price of natural gas. President Bush’s administration declares that they also raise other funs for heating purposes.
Saint Louis inhabitant Irene O’Conner rears four children alone. 42 years old O’Conner says that her average monthly incomes make up 700 USD and that she expects 600 USD from the federal aid fund, which is a big help since in December only she received a 300 USD heating bill. She uses the same amount of gas but the figure in the bill is sharply increasing.
The President also says that the expenses intended for the Construction and Urbanization Department will be reduced in the budget by 1.8%. The aid program for old people with low incomes, which is known under the name of Section 202, will also be reduced by 26%. The financing of Section 811 program, which was intended for invalids with low incomes, will be reduced by half.
Dilemma
The presented figures may confront representatives of the both parties with the dilemma. A republican from Missouri says that such big cuts will not bring good results. Christopher Bond who is the Chairman of the Committee for Supervision over Housing Construction makes his comment on the draft budget presented by the White House: “I have an impression that the representatives of the White House sit in a chrysalis and make a proposal from there”.
Mean while the White House Budget Director told to reporters that the country is facing a war and catastrophes, and the government should pull in a belt.
Some people complain that pulling in of belts does not threaten the federals, since the sums allocated to them during the presidencies of Clinton and Bush have been almost doubled.
Decrease of financing is continuing
In the recent past the Congress adopted the medical care program, in accordance with which poor people have to pay more for registration of their health. For instance, in the state of Missouri health protection expenses were reduced by 626 million USD and made up 5.3 billion USD in the current fiscal year.
A 32 years old unwed mother says that she has two jobs and her average income makes up 600-800 USD a month. She has been registered on the books for getting medical care since 2003 after she lost a full-time job in the Bank of America. She had been looking for a high-paid for four months, then returned to college to get a bachelor’s degree in psychology. A student’s loan and scholarship are not enough to pay the bills. Her two sons are registered on the books for getting medical care, but if it turns out to be impossible she will have to give up her house, car and respect to herself.
The reduction of financing threatens the public health grant program as well. The financing of this program was sharply reduced in 2002. Last year the President proposed to liquidate it, though the Congress financed it in the amount of 630 million USD. In his draft budget Mr. Bush again proposed to liquidate the program.
In February the US budget deficit reached 119.2 billion USD
The US Treasury made a report in which it is said that the US budget deficit in February was a bit less than it was expected – 119.20 billion USD. This indicator has broken all records that have to do with monthly budget deficit. According to the Treasury Department, the government deficit is higher than the last year’s one by 5%. According to the unverified data, the January increase makes up 20.99 billion USD.
For the US government, February was a month of large expenses and deficit; it was also less profitable in comparison with other months.
The Treasury declares that the last month’s total expenses made up 232.05 billion USD. This sum exceeds the last year’s expenses by 8%, and is 11% more than January ones.
February deficit was a bit less in comparison with the forecast of the Budget Service of the Congress – the presumable sum of the deficit is equal to 121 billion USD. The Congress declares that the expenses has been growing at high rates, which was related the hurricanes, medical care, public security and growing of interests on the country’s debts. According to the White House’s plan, on completion of the 2006 fiscal year, which will be over on September 30, the total deficit will make up 423 billion USD, last this sum was equal to 318 billion USD. Other forecasts related to the budget deficit show lower figures. According to the Budget Service of the Congress, that this year’s deficit will be 371 billion USD, that is 2.8% of the GDP. Many other private sectors expect lower budget deficit in comparison with the White House.
According to the Treasury, the US budget deficit in the first five months of 2006 fiscal year has made up 217.52 billion USD, which is 2.6% lower against the corresponding period of 2005. In October-February period the incomes made up 873.07 billion USD, this sum is 10% more than the incomes of the last year’s corresponding period. However, this fiscal year’s expenditure exceeds 1.091 trillion USD and is 8% more than it was last year.
In February of 2006 fiscal year the total tax revenues from individual incomes make up 393.34 billion USD, that is 11% more in comparison with the last year’s corresponding period.
Last month the US government paid from the real income the share in the amount of 18.44 billion USD for the Federal Reserve debts. The share of the real income that is paid to the Federal Reserve does not include nonmarket government security share that is controlled by the Federal Trust Fund and has to do with public security.
Energy
Are the energy resources’ prices cursed or blessed? The big oil’s answers depend on those that raise this question.
In the recent past the executives of oil companies used to proudly declare how cash reserves were increasing in their corporations thanks to oil price of 60 USD per barrel. In the nearest future they will be trying to convince the government in a pitiable tone to help them in order to find new ways of meeting the public demand for oil and natural gas.
The reason for the different tone is Geography. In the recent past (in early March) the big oil was on a visit to Wall Street, while in the nearest future it will take the course to Capitol Hill.
Let us listen to the strongest executives: Rex Tillerson, the chief executive of Exxon Mobil Corp. He reminded financial analysts that in 2005 the corporation’s profit made up 36 billion USD, which is the first case in the history of the US companies. He says that Exxon’s financial success is a result of discipline in the company. Though Exxon is planning a production growth for along period of time, and is not occupied with searching for a way out in view of high energy resources prices.
It is expected that Mr. Tillerson will sharply alter his statement when he and other leaders of big oil will have to appear before the Senate’s Committee and television cameras if their enterprises are accused of contributing to increasing of oil prices.
In his nterview, Exxon CEO offered the authors of the American policy to ease the pain of the Americans. Mr. Tillerson says that if the federal government really wishes to increase the supplies by the energy resources produced inside the country, the development of additional fields is necessary. He considers it irresponsible to completely exhaust resources from the American people. At the same time, American politicians should stop misleading the people saying that the US will be really able to secure its independence in the energy sphere. He says that America is the main importer of energy resources. However, Mr. Tillerson did not point out President Bush’s appeal to reduce by 75% the oil import from the Middle East by 2025. Mr. Tillerson considers American politicians’ allegation concerning creation of artificial barriers for defense purposes as an irresponsible policy.
The idea that the US is capable of meeting its demand for energy resources without a considerable import of fuel is considered by Exxon’s Chairman as unreliable, he says that this statement is far from being real.
The US trade balance exceeds 68.51 billion USD
The US trade balance continues to break records. Increasing of Chinese import and America’s relying on foreign capitals has become the reason of political discontent in the Congress.
The trade deficit has reached the level of 68.51 billion USD and exceeded the December one by 5.3%.
The Export of goods and services has increased by 2.5% and reached 114.47 billion USD, which is based on air and other kind of transport services. Economists predict that this year’s good trend will continue since the demand of Europe and Japan are increasing.
However, import is growing at higher rates than export. Its growth makes up 3.5% and is equal to 182.88 billion USD. The demand for cars and different kinds of fuels products is sharply increasing though the price of crude oil import was reduced.
The trade deficit with China has decreased to 17.92 billion USD after it broke a record in October and made up 20.51 billion USD.
What problems does America have in its relations with China?
The tensions in trade relations between the US and China becomes the main subject of the negotiations between Bush and Hu Jintao in Washington. The US is worried about the fact that a rapid growth of Chinese export will reduce the number of jobs in America. The US producers complain and blame China for incorrect evaluation of its currency. However, China is a growing market for America, a lot of US companies make investments in Chinese factories. So, how should these complaints of the US be considered?
In theory, China and America have reached an agreement that free trade between the two countries would be a long-run and profitable project. In 2001 China became a member of the World Trade Organization. Chinese President Hu Jintao confirmed it during his visit to Boeing plant: “China and the US have benefited as a result of bilateral cooperation in trade”, said the President.
In 2005 China’s trade with Boeing and Microsoft had a huge increase – 200 billion USD. China’s incomes from trade were increasing, that is why it became the largest purchaser of America’s securities, which was very useful to American budget deficit.
Many Washington’s representatives complain of China’s unfair trade. It has been a long time since the US demanded toughening of control over textile export from China. Now most of the US entrepreneurs insistently maintain that Chinese currency is improperly evaluated, and for this reason the prices for Chinese export are being artificially reduced. They demand that the Chinese government should increase the currency’s value by 40% in order to restore competitiveness between Chinese and American goods. Beijing that has increased the cost of Chinese currency in relation to USD by 2% denies any manipulations with the currency. Presently, the WTO supports the US and declares that a currency reform should be carried out in China. In its review of Chinese trade the WTO declares that China needs an independent currency policy that will be a basis of inflation’s stable indicator. However, reevaluation of the Chinese currency will upset plans of many foreign investors, which will make expensive a purchasing or construction of a factory in China. For this reason, it is possible that the indicator of growth of the Chinese economy, which is filly dependent on export, will decrease 3 fold. This step is unprofitable for the US since the cost of USD may decrease 3 fold as well, that is why there will be a great threat of increasing of inflation and rates. Most economists believe that reevaluation of the Chinese currency will also affect the currencies of other Asian countries and euro.
In spite of all this, trade relations between the US and China continue. China is a gain playing the leading role in the global trade. America has a huge budget deficit of internal investments, and a small increase in trade, which is not related to China only.
It easy to assert anything in theory, implementation of real activities is much more difficult.
The government declares that bird flu will cause damage to the US export
The turmoil related to avian flu cuts down American bird trade. The Ministry of Agriculture declares that decreasing if prices is already observed in this sphere of trade. This year the US was to export 5.3 billion pounds of bird meat. Unlike farmers, the companies undergo a crisis. The farmers that are engaged in breeding of hens and turkeys still get stable prices from bird meat producing companies. According to economists, avian flu has a negative effect on the international demand.
Chicken trotters is a cheap export product and its price has decreased by 40-50%. The chief economist of the Ministry of Agriculture Kate Collins says that the price reduction was moderate and there is nothing to worry about. She points out that annual improvement in this sphere is expected, the main export markets of their bird meat is Russia, Mexico and China that continue to purchase it.
Last year bird meat export made up 5.14 billion pounds, which is less than the forecast for 2006. The Ministry declares that in spite of the threat related to avian flu, the demand of American consumers will be retained.
This year one person will on average consume 87.7 pounds of chicken meat, but according to the forecast made last month, this figure is equal to 87.2. Experts say that enterprises monitor the consumer confidence. They point out that there is still no threat being worthy of notice, but everyone should do their best to retain this situation.
The Ministry declares that bird meat prices are low in view of the export’s decreasing and production growth, but beef and pork prices remain unchanged.
According to the forecasts of the Ministry of Agriculture made in March, the prices of cereals and soybeans will increase, the price of rice will decrease and the price of wheat will remain unchanged.
The long-term rates are rising
American Federal Reserve stubbornly continues increasing of the long-term rates that already make up 4.905%. The federals also control the rates of short-term loans, but they have less influence on long-tern loans that are unambiguously dependent on inflation, its forecasts and investors’ interest in securities. Until recently, the federals did not touch upon the long-term loans, but they are also going to do it after Japan and Europe. A more expensive loan makes the population and companies spend more money. Some economists from the Federal Reserve believe that high rates will play a leading role in stopping of the current processes related to the long-term loans. In their opinion, this step may really cause slowing down of the economic growth. In early April the federals increased the rate of short-term loans from 4.5% to 4.7%. It is more important that, according to the message, they will increase to 5% by May 10. Economists say that the market becomes aware that the rates will not only increase to 5%, but that they will not be reduced.
Raising of rates of the long-term loans is a big change for the Federal Reserve. Alan Greenspen did not touched upon them. But now everything has changed. The rate of a 30 year loan for a dwelling house makes up 6.54%, while last year it was 6.17%. Deutsche Bank’s economist says that this phenomenon cannot be called a normal one. During the period when the Federals increased the rates of short-term credits, they remained unchanged in Japan and Europe; due to this fact this phenomenon turned out to be ineffective, since investors could get cheap credits elsewhere. Many of them purchased profitable US securities with a cheap credit, because of which their price increased considerably.
Japanese and European economies are in a better condition than it was expected, which is stipulated by increasing of consumer expenditure and absolute business confidence. According with the latest data, foreigners show a great interest in the US securities. A manager of a securities management firm in California says that rates of the long-term loans should be raised with the purpose of increasing of competitiveness. Companies almost passed to the offensive, almost craved for credits since they suspected that they will rise in price. Low prices of credits in the housing sector had a big response, but its slowing down is expected along with increasing of the rates. According to economists’ conclusion, housing prices react to changes most of all. In 2007 a 1.5% shrinkage of the housing market is expected.
In conclusion it can be said that, according to economists’ opinion, the rates will be increasing while the economy is able to endure it, or to be more exact, while the federals believe that the economy will be able to endure it. The Chairman of Kansas City Federal Reserve Tomas Hoeing declares the economy is on the rise and should not turn off this road.