US returns to fiscal folly

PUBLISHED : Friday, 07 April, 1995, 12:00am
UPDATED : Friday, 07 April, 1995, 12:00am

TAXPAYERS like to see their tax reduced, so the Republicans undoubtedly believe they are on a winner with the US$189 billion in cuts over five years passed by the House of Representatives yesterday. However, if the Republican Party gains electoral advantage from such cynicism, the United States is likely to lose - in economic terms, and in credibility.

If a country pursues short-sighted and irresponsible policies at home, who will share its vision internationally? The House of Representatives appears set on inverting the late John Kennedy's idealistic appeal: 'Ask not what your country can do for you; ask what you can do for your country.' Just when the US needs leadership and vision, the Republicans gird their loins for a return to 'feel-good' fiscal folly. But the numbers do not add up. The Treasury estimates the proposed tax cuts will cost the country US$630 billion over 10 years. More immediately, the cost of balancing the budget will widen to an estimated US$1.4 trillion from US$1 trillion.

House Speaker Newt Gingrich suggests savings in Medicare and a broader attack on welfare as a way of bridging the gap. But the old, the sick, the unemployed and the illegitimate do not have $1.4 trillion to subsidise middle-income handouts.

Tax cuts make perfect sense when a country has its deficit under control, or when corresponding and specific spending cuts have been agreed. Hong Kong is a perfect example of an economy that combines low tax rates with dynamism and growth and the US would do well to follow the territory's example. Eliminating all allowances to individual taxpayers would be a step in the right direction.

But the territory's economic strength is based on hard work and budgetary discipline, not smoke and mirrors. Washington should focus first on cutting spending, and only then expend time and energy on framing ways of enjoying the benefit that accrues.