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Under fire for red ink, U.S. vows to halve deficit by '08

U.S. Treasury Secretary John W. Snow speaks at opening ceremony of '03 meeting of International Monetary Fund and World Bank in Dubai, United Arab Emirates, Tuesday. Both groups have expressed concerns about U.S. deficit.
U.S. Treasury Secretary John W. Snow speaks at opening ceremony of '03 meeting of International Monetary Fund and World Bank in Dubai, United Arab Emirates, Tuesday. Both groups have expressed concerns about U.S. deficit.
Kamran Jebreili, Associated Press

DUBAI, United Arab Emirates — U.S. Treasury Secretary John Snow told global bankers and economists worried about the tide of red ink in Washington that the huge U.S. budget deficit would be halved by the end of 2008.

Snow made the pledge Tuesday at the annual meetings of the International Monetary Fund and World Bank, both of which have cited the growing U.S. trade and budget deficits as dark clouds looming over the fragile global recovery.

He called the budget deficit an "understandable" consequence of the recent recession, and told delegates from 184 countries that it would be tamed through "ample growth" and "disciplined spending," having earlier ruled out any tax increases as "counterproductive."

"We're committed to cutting the deficit by half in the next five years," he said, saying that level would be "certainly very manageable."

He offered few other details on how the United States would reduce the deficit, which the Treasury Department has said reached $400.5 billion in the first 11 months of the 2003 budget year — twice the total for the same period a year earlier.

IMF managing director Horst Koehler acknowledged that the "sharp swing" in public spending in the United States had helped stimulate growth after the slowdown — a point Snow also made.

Koehler said, however, that the United States now needed a "credible framework" to reduce its deficit as growth stabilizes, so as not to cause problems in the coming years.

Economists fear that the deficits, which are financed mainly through sales of government and corporate bonds overseas, will eventually have to be reined in, which could send the dollar plummeting and force up U.S. interest rates.

"A return to the path of strong, sustained growth requires action to improve imbalances which not only persist but are widening," said Bank of France Governor Jean-Claude Trichet, who takes over as president of the European Central Bank in November.

Snow suggested that the trade imbalance would not be so bad if other countries worked at increasing domestic demand and making themselves more attractive to investors.

His Spanish counterpart agreed.

"The U.S. economy is significantly reactivating its growth," boosting the rest of the world, said Spanish Finance Minister Rodrigo Rato. But that may not last "if we don't include other zones in the world."

Koehler also told Europe and Japan, where growth lags far behind the United States, that ambitious reforms of their hidebound economies must take "center stage." He urged Japan to sort out its corporate and financial sectors and said Europe should reduce chronically high unemployment by making labor markets more flexible.

France and Germany were chided by fellow Europeans as well for their budget deficits, which are almost as bad as Washington's as a percentage of gross domestic product.

World Bank president James Wolfensohn, meanwhile, launched a blistering attack on rich countries for spending hundreds of billions more on their militaries and their farmers than they do helping the poor.

"Our planet is not balanced," he told delegates in an opening speech. "Too few control too much, and too many have too little to hope for."

He criticized rich countries for providing just $56 billion a year in development assistance to poor countries, compared with more than $300 billion they spend on agricultural subsidies and $600 billion spent on defense.

The failure of global trade talks last week in Cancun, Mexico, highlighted the deep divide that must be overcome to create a stable future, Wolfensohn said.

Rich nations balked at greater cuts in farm subsidies and poor nations, who say their farmers suffer as a result, refused to proceed on other concessions sought by the West.

"There seems to be a lack of symmetry which is hurting mostly the poorest countries," Mexican Finance Secretary Francisco Gil Diaz told The Associated Press.

Snow and other Western leaders lobbied for a quick resumption of the World Trade Organization negotiations, arguing that breaking down barriers to global commerce would benefit all.

But Wolfensohn said wealthy nations need to practice what they preach.

"It is inconsistent to preach the benefits of free trade and then maintain the highest subsidies and barriers for precisely those goods in which poor countries have a comparative advantage," he said.

Developing countries are not blameless, Wolfensohn said, noting they spend more on defense — $200 billion — than education.

The money summit, which wraps up Wednesday, is the first such event held in an Arab country, and many delegates called that a good signal for a troubled region.

"This part of the world will not be able to realize its full economic potential until ... the international community makes a serious effort to bring peace and security to the region," said Sheik Hamdan bin Rashid Al Maktoum, finance minister of the host, the United Arab Emirates.