Katrina relief to worsen groaning US deficit

17 minutes ago

WASHINGTON (AFP) - Its furious winds and rain are now spent, but Hurricane Katrina will long endure on the US government's balance sheet as economic growth is curbed and vast sums are spent on disaster relief.

The US Congress has approved more than 62 billion dollars to meet the immediate needs of the relief operation after Hurricane Katrina displaced hundreds of thousands of people from New Orleans and other ruined towns.

It is a massive injection of money when compared with the 76 billion dollars agreed by Congress in May for US military operations in Iraq and Afghanistan.

The Katrina spending, which equates to over 600 dollars from every US household, will rise still further.

Evacuees have to find jobs, homes, healthcare, benefits and schools for their children. Many of them, living below the poverty line in New Orleans, already had little.

"This Katrina funding is already at 60 billion. The expectation is that it will go higher," US Treasury Secretary John Snow said Friday.

Senate finance committee chairman Charles Grassley believes that federal spending after Katrina could hit 150 billion dollars. Republican Senator Jeff Sessions said a figure of 200 billion dollars was possible.

"Usually the federal government takes a much more limited role in natural disasters," Lehman Brothers economist Ethan Harris said.

"Katrina has had a much bigger impact on the local economy than past hurricanes, but the federal spending response is proportionately even bigger," he said.

The spending so far nearly matches the 70 billion dollars that is the combined gross domestic product of New Orleans, Gulfport-Biloxi, Pascagoula and Mobile, the four worst-hit conurbations.

Economists agree that the massive government intervention will help sustain the economies of Louisiana and neighbouring states in the weeks and months before rebuilding can start in earnest.

But it will not make a pretty picture for a budget situation that already looks ugly.

Merrill Lynch economist David Rosenberg bid "goodbye to the 2006 deficit projection" of 314 billion dollars, predicting it would shoot to a new record high to beat last year's figure of 412 billion dollars.

"Katrina has now become a great valve for Congress to spend gobs of dough, keep the economy alive and save their re-election prospects in November 2006," he said.

The US administration had been hoping to turn the tide on the deficit, after years of rising shortfalls created by huge war spending coupled with President George W. Bush's multi-billion-dollar tax cuts.

But now, some members of Congress are growing anxious as Katrina spending piles onto the other demands on the government's strained finances.

Mike Pence, a Republican member of the House of Representatives, said it was only right that federal authorities come to the aid of Katrina's victims.

"But as we tend to the wounded, as we begin to rebuild, let us also do what every other American family would do in like circumstances and expects this Congress to do: let's figure out how we are going to pay for it," he said.

"Congress must ensure that a catastrophe of nature does not become a catastrophe of debt for our children and grandchildren."

Fiscal sticklers among both Republicans and Democrats were already aghast at what they say is federal spending run wild, after Bush last month signed a bill that plans more than 286 billion dollars in expenditure on transport projects.

In an editorial, the Wall Street Journal said it feared that Congress members would impede a post-hurricane recovery "by exploiting Katrina to spend like they're back on Bourbon Street" in New Orleans.

"Which leads us to ask: Where is President Bush?" said the newspaper. In the US system, "only a president can stop a runaway Congress".

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