Economy & Trade, Headlines, Labour, North America

ECONOMY: High Hopes, Mixed Prospects for U.S. Stimulus Package

Abid Aslam

WASHINGTON, Jan 24 2008 (IPS) - U.S. legislators struck a deal Thursday aimed at saving the economy from being sucked under in a maelstrom of bad mortgages and financial speculation.

Congressional leaders said they agreed to 150 billion dollars in tax breaks aimed at spurring spending by businesses and consumers.

Under the plan approved by lawmakers from President George W. Bush&#39s Republican Party and his opponents in the Democratic Party, individuals stand to receive rebates of 300-1,200 dollars, and more if they have children. The rebates would begin to diminish for high-income taxpayers.

Some 116 million families could benefit and authorities could start issuing rebate cheques in May.

The package also provides nearly 50 billion dollars in temporary tax breaks aimed at spurring corporate spending on plant and equipment.

Businesses would be able to write off 50 percent of the money they spend on equipment as soon as they begin to use it rather than having to wait until the following or subsequent years. Small firms could immediately expense 250,000 dollars in equipment purchases, twice the current limit.

John Boehner, the Republican minority leader in the House of Representatives, or lower chamber, said the measures "will give businesses incentives to create and build new jobs in our country."

Republicans had to drop a proposal that would have allowed firms suffering losses now to claim these against taxes paid earlier.

Even so, they emerged from a week of bargaining with assurances that taxpayers would receive more than 70 percent of the package, limiting the benefit for workers too poor to pay taxes.

Nancy Pelosi, leader of the Democratic majority in the House, said her party came away from the negotiation having added 28 billion dollars for 35 million working families excluded from Bush&#39s original proposal.

In exchange for rebates for those earning too little to pay income tax, however, Pelosi relinquished two proposals colleagues and commentators had described as essential. One would have increased federal food subsidies for low-income families and the other would have bolstered temporary financial aid for the unemployed.

"I can&#39t say that I&#39m totally pleased with the package, but I do know that it will help stimulate the economy," Pelosi said at a news conference. "If it does not, then there will be more to come."

The Senate must approve the deal before it is sent to the White House for Bush&#39s signature.

Max Baucus, the Democrat heading the Senate Finance Committee, announced plans to craft a separate stimulus package in the upper chamber. He described the House failure to raise unemployment benefits as "a mistake".

Official and independent analysts appeared to share his view.

The Congressional Budget Office and the private sector&#39s Moody&#39s Economy.com both had given their top marks to the two proposals jettisoned in the House, saying boosting the "food stamp" and unemployment benefits programmes would prove the most effective ways to stimulate the economy.

Every dollar spent on extended unemployment benefits would generate 1.64 dollars in increased economic activity, according to Economy.com. Every dollar in increased food stamp benefits would spawn 1.73 dollars in new economic activity, it said, adding that no other proposal in the package would do as much.

By contrast, the unit of the Moody&#39s ratings service said every dollar spent on the main business tax break in the package – so-called "accelerated depreciation" – would generate only 27 cents of increased economic activity.

Could the corporate tax breaks actually hurt?

"The business tax cuts also would cause states to lose at least 4 billion dollars in state revenue," said Robert Greenstein, executive director of the non-governmental Centre on Budget and Policy Priorities.

"Many states will have to enact deeper and more painful budget cuts, likely hitting areas from health care and education to aid to local governments. Those state budget cuts will also act as a drag on the economy," said Greenstein.

The package unveiled Thursday also featured measures aimed at providing stability in real estate markets. One would allow more borrowers to convert dodgy, high-interest mortgages into loans insured by the federal government. Another would allow federally backed housing financiers to buy bigger home loans in higher-cost markets.

Thursday&#39s deal followed action by the Federal Reserve, the U.S. central bank, which on Tuesday cut the key interest rate by three-fourths of a percentage point in hopes of easing a credit crunch and calming financial markets.

Institutional investors welcomed the action, which followed earlier rate cuts, but one money fund consultant said the rate cuts would cost millions of individual investors with savings in money market funds.

Also known as principal stability funds, these appeal to people with moderate savings as they seek to limit volatility by investing in government treasuries and other short-term but top-rated debt.

Money funds tend to track interest rates, however. As a result, the Fed&#39s cuts " perversely penalise those we should be rewarding and encouraging, savers," said Peter Crane, president of Crane Data. "Money market investors will see their yields quickly follow the Fed lower."

Separately, the IMF said Thursday that economic and market volatility led it to postpone the release of its latest forecast of global growth until next week. The updated World Economic Outlook had been expected Friday.

Masood Ahmed, the fund&#39s external relations director, signaled there would be no change in the agency&#39s near-term U.S. forecast.

"We still see a period of below-potential growth as the most likely scenario for the U.S.," Ahmed told a news conference.