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Home > Business > Reuters > Report

Price of Iraq occupation could dwarf war's cost

Jonathan Nicholson in Washington | March 27, 2003 11:33 IST

The price of a post-war US occupation of Iraq could be so big that some experts fear it would make the cost of combat alone pale in significance.

This is especially true because consideration of the war's ultimate price tag, and how to pay it, comes at a time the US government is already awash in red ink.

This week, the White House asked Congress for almost $75 billion in extra money to pay for a relatively short war in Iraq.

While Congress has yet to set aside funding for rebuilding in the current budget debate, worries over the war's eventual costs were cited in the Senate's Tuesday vote to whack US President George W Bush's proposed 10-year tax cut of $726 billion in half.

For a government that spends more than $2 trillion a year, a one-time expense of $75 billion is relatively small. It will, however, add to what the Bush administration has already estimated will be a record budget shortfall of $304 billion in 2003 and it will mean additional debt will be added to the government's current outstanding debt of $6.400 trillion.

The Council on Foreign Relations, in a recent report, estimated that the United States may need to station 75,000 troops in Iraq, which, with aid efforts, could cost $20 billion a year "for several years."

Bob Bixby, executive director of the Concord Coalition, a balanced budget advocacy group, said the annual costs could run between $10 billion and $30 billion.

"No one really has any idea about how much this might cost," said Lyle Gramley, a former Federal Reserve governor and a senior economic consultant with Schwab Washington Research Group. "It could be very, very big bucks."

Different wars, different costs

In World War II, the United States ran up huge amounts of debt to finance a global war fought on two fronts. While it left the war with a big debt burden, it quickly worked it off. Publicly held debt as a percentage of US gross domestic product fell to 57.3 per cent by 1955, after peaking at 108.6 per cent in 1946.

In Vietnam, the increasing US involvement throughout the decade of the '60s was also financed by government borrowing, though to a much smaller extent. The decision to finance the war at the same time as then-President Lyndon Johnson's Great Society social programs led critics to say the administration was buying both "guns and butter."

The last major US war, the original Persian Gulf War in 1991, was a different matter. As part of a much larger international coalition, the United States successfully raised almost all of the approximately $61 billion cost through international contributions.

A Treasury spokesman on Tuesday declined to comment on whether Iraq occupation costs could affect Treasury's long-term borrowing patterns.

There is, however, a very small cash cushion left over from the 1991 Gulf War. The Defense Cooperation Account, where money from US allies was deposited to help pay for the first Gulf War, still had about $657 in cash and another $13.1 million in holdings of US government securities on hand at February's end, according to the Treasury Department.

Creeping growth

The cost of keeping troops in Iraq after the war depends on several variables, experts say. The size and duration of a post-war US operation is a major question and likely would  depend on how well a post-Saddam Hussein regime is accepted. Another variable is whether the costs could be shared with other nations or defrayed through oil sales.

But if the United States is faced with a long, solitary commitment, it could have consequences for the economy.

One problem could be a creeping growth in expenses reminiscent of the Vietnam era. The costs of the continued escalation of US efforts in Vietnam were not foreseen and, some argue, played a part in the rise of inflation in the late 1960s and early 1970s.

"Vietnam snuck up on budgeters," said Lou Crandall, chief economist with Wrightson ICAP.

Another possibility is a return of the early '80s economy, according to Schwab's Gramley. Seeing an expensive military buildup leading to massive deficits under the Reagan administration, the Federal Reserve was compelled to keep inflation-adjusted interest rates high in order to hold inflation in check, he said.

Those rates, he said, kept productivity growth low and economic growth muted.

"That, I think, is the risk we run," he said.

Others think those worries are overblown. Stephen Stanley, senior market economist with RBS Greenwich Capital, said it's unlikely other nations would refuse to underwrite or take some part in post-war Iraq operations.

Stanley also said capital markets would not necessarily hear alarm bells from a somewhat higher budget deficit.

"Ultimately," he said, "it's a question of what is its relation to the size of the economy and where do we think it is headed."



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