By Simon Kennedy
Paris, (Bloomberg) -- U.S. Treasury Secretary John Snow called President George W. Bush's $690 billion tax-cut plan ``critical'' to lifting a weak global economy, a contention challenged by some European policy makers wary of swelling U.S. budget deficits.
``President Bush's jobs and growth package is critical -- not just to the U.S. economy, but to the international economy,'' Snow told reporters at his first meeting of finance ministers and central bankers from the Group of Seven industrialized nations. ``The strength of the international economy is tied to the performance of the U.S. economy.''
Each G-7 member needs to take its own steps to spur growth, and that's what Bush seeks to do by accelerating previously passed tax cuts and dropping the corporate dividend tax, Snow said. Some European officials echoed U.S. Democrats' complaints that widening deficits might instead undermine growth.
``It is a cause for concern for Europe and the world that the situation of twin deficits seems to re-emerging,'' European Central Bank President Wim Duisenberg said.
Snow's campaign for tax cuts even during his four-day trip to London and Paris shows his major focus is the domestic economy and winning congressional passage of the plan. Democrats have said Bush's third tax cut in two years helps mainly the rich and Federal Reserve Chairman Alan Greenspan has said stimulus isn't needed because growth will rebound when tension ends with Iraq.
German Finance Minister Hans Eichel said that the G-7 ``has to have a few worries about the twin deficit,'' before adding that higher U.S. growth would benefit the world.
`Every Corner Gets a Lift'
The Treasury secretary rejected the European criticism, predicting that lower U.S. taxes would mean ``every corner of the world will get a lift.'' The budget deficit was ``modest'' when compared to the size of the $10 trillion U.S. economy, would decline in coming years and was necessitated by a soft economy, he said. The trade deficit would narrow once global growth rises.
Not every European official was critical. U.K. Chancellor of the Exchequer Gordon Brown said ``it is right in circumstances when the global economy is moving slowly'' to ease fiscal policy, a point also made by French Finance Minister Francis Mer, who cut taxes by 3.9 billion euro this year. Bank of Italy Governor Antonio Fazio said the size of the U.S. economy also meant the rising budget deficit wouldn't prove a long-term concern.
Greek Economy Minister Nikos Christodoulakis repeated Duisenberg's concerns about simultaneous large budget and trade shortfalls. Economists have said mounting imbalances in the 1980s lifted the U.S.'s debt burden, deterred foreign investors and undermined growth.
Twin Deficits
``Large twin deficits may create sustainability risks, which in case they materialize would have significant ramifications beyond the U.S.,'' said Christodoulakis, who attended the talks as Greece holds the rotating presidency of the European Union. ``These concerns have not been dissipated by the recently proposed fiscal package, in terms of size, composition and timing commensurate to the challenges we face.''
Record U.S. budget and trade shortfalls emerged as a problem in the 1980s when the budget gap expanded from 2.7 percent of gross domestic product at the start of the decade to 5 percent by 1986, just as the current account deficit rose from zero percent of GDP to 3 percent.
The U.S. trade deficit unexpectedly rose to a record $44.2 billion in December, the Commerce Department said Thursday. The White House has forecast a budget deficit of $307 billion next year, the biggest dollar amount on record while still below the percentage of GDP reached in the 1980s.
Growth Forecasts
Snow returns to Washington tomorrow and plans to push the president's plan again next week in speeches, television appearances and meetings with key lawmakers.
The Treasury estimates the U.S. economy will grow 3.3 percent and create 500,000 new jobs this year if Congress acts by mid- year. Snow reiterated the U.S.'s support for a strong dollar.
The G-7 met as most members struggle to recover from recession and as war tensions curb business and consumer spending. International Monetary Fund officials have said a conflict with Iraq may cut this year's global growth in half from last year's 3 percent.
Snow said an ``early resolution'' of the impasse between the U.S. and Iraq was desirable and that war was still the ``last resolve.'' Equity markets and capital spending would rise and oil prices would fall once the uncertainty passes, he said.
U.S. GDP climbed at an annual rate of just 0.7 percent in the fourth quarter. ``We are not growing fast enough or strongly enough,'' Snow said. ``Within the international community, the United States must lead by example.''
Euro Nations
The economy of the dozen euro countries may shrink this quarter, after the slowest expansion in almost a decade last year. Japan's GDP rose 0.3 percent in 2002. The G-7, which includes the U.S., Japan, Germany, France, the U.K., Italy and Canada, account for two-thirds of the global economy.
While Snow's advisers said he didn't tell other governments how to bolster their own economies, as some of his predecessors did, the new Treasury chief encouraged others to take action to gird their recoveries.
``Each G-7 nation must take its own steps, appropriate to its own respective set of conditions, to spur growth,'' he said. ``That's important, since our prosperity is tied to stronger growth outside of the United States.''
Different Tone
Snow represented the U.S. at a G-7 meeting for the first time since replacing the ousted Paul O'Neill at the Treasury. O'Neill had attended the past eight summits.
While both said they would ``listen and learn'' at their G-7 debuts, O'Neill went on to question the worth of the forums, halve their length when hosting them in Washington and reduce the size of the post-meeting statement to a single page.
Snow praised the sessions as a ``valued opportunity to exchange views and work together on key issues.'' He had pledged not to be ``demonstrative'' with his counterparts who resent being told how to spark growth by foreign governments.
Japanese Finance Minister Masajuro Shiokawa told reporters that Snow, the former chief executive of railroad CSX Corp., was ``really like a businessman and is very energetic.'' Italian Finance Minister Giulio Tremonti said Snow has ``had a lot more political experience than O'Neill'' and ``is definitely a man of stature and responsibility.''