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BUSH’S BUDGET – GOOD NEWS & BAD NEWS

GODSPEED: Our hearts and prayers go out to the families of the Space Shuttle Columbia Astronauts who tragically lost their lives on Saturday.  We also pray for the safety of all brave men and women who serve our country and keep us safe.

IN THIS ISSUE:

1.  Bush Announces Huge New Federal Budget.

2.  Deficit To Soar To $300+ Billion In 2004.

3.  Bush Can Spend With The Best Of Them.

4.  The Truth On The Tax Cuts.

5.  New Savings/Retirement Plans.

Introduction

On Monday, the Bush administration released its proposed federal budget for fiscal 2004.  As expected, it was met with support from Republicans and disdain from the Democrats.  The record-large $2.23 trillion budget increases government spending by 4.2%, as compared to the inflation rate of only 2.1%.  The new budget includes a major increase in military spending; in fact, apprx. half of all the new spending will go to the military; most domestic government agencies will see smaller funding increases, percentage-wise, than in the past; and some agencies actually have their funding cut in the new budget.

The good news is, the increased federal spending will help stimulate the economy and, hopefully, make us safer from terrorism.  The bad news is, the new budget projects a 2004 deficit of $307 billion, the largest ever.  And that doesn’t include another $50-$100 billion we will spend if we go to war with Iraq, plus additional funding that may be needed by the Department of Homeland Security.   The deficit could easily rise above $400 billion.

In the past, I have criticized presidents for running large budget deficits, including Ronald Reagan and George HW Bush and others.  I am similarly critical of George W. Bush for not holding back spending more than he did, but at the same time, I do agree that our military and homeland security take top priority at this time in our history.

I will discuss these issues – pro and con - in the pages that follow.  I will also discuss the new Bush savings proposals that would allow many people to put away up to $29,000 per year, mostly in tax-deferred accounts.  This is very good news but has been overlooked by many.

Republicans Spend With The Best Of Them

My first and overriding thought when I saw the budget amount and breakdown today was that the Republicans have just proven they can spend money they don’t have just as well as the Democrats.   As noted above, the overall budget increases by 4.2% as compared with an inflation rate that could actually be less than 2% in fiscal 2004.

The budget surpluses that were projected several years ago have now disappeared.  The budget deficit for fiscal 2003 is expected to hit around $160 billion.  The projections for 2004 and 2005 show the deficits at $300+ billion, not counting the war with Iraq, additional funding for homeland security and any subsequent military actions in the War On Terror.

The Bush administration tried to “spin” the $300+ billion deficit as follows.  The $307 billion projected deficit is only 2.7% of projected GDP in 2004.  That, they say, compares with deficits that equaled 6.3% of GDP when Ronald Reagan got his tax cuts implemented.  These numbers may be true, but the latest projections from the Office of Management & Budget show the national debt increasing by over $1 trillion in the next four years.

The Problem With Deficit Spending

The theory is that you run deficits during bad economic times; then you run surpluses during the good economic times; and it should all equal out over the long-run.  The problem is, politicians can’t resist increasing the size of government, thereby spending the surpluses.  The debt just goes up and up and up.

I completely agree with some of the increases in Bush’s new budget.  The Defense Department would receive $380 billion, a 4.2% increase.  Some had expected this number to be even higher in our efforts to rebuild the military.  Homeland Security will see its budget increased by 5%.  NASA will see its budget increase by 3% to $15.5 billion – this increase was in the budget before the shuttle tragedy last Saturday.  These are increases I can live with (assuming Homeland Security accomplishes its mission, and that’s a big “if”).

But there are many other increases I don’t like.  The State Department and “International Assistance Programs” will increase by 12%, the largest single increase in the Bush budget.  Much of this money goes overseas and is a drag on the US economy.  Only two areas will see a cut in funding under the new budget.   The Labor Department has a decrease of 1%, and the Justice Department has a 3% cut in budget.  All other agencies increase under the new budget.

The Truth About The Tax Cuts

[Editor’s Note:  In the next few paragraphs, I will probably manage to irritate both liberals who despise tax cuts AND conservatives who love them.]

The conservatives’ theory is that if you cut taxes and allow people to keep more of their money, they will spend more, the economy will grow faster and government receipts will increase.  The tax cuts, they argue, may increase the deficit in the short-run, but will lead to surpluses in the long-run.  But as noted above, this rarely happens.

If Bush gets his tax proposal accelerated, this will mean that some $75.7 billion less in tax receipts will flow into the government in 2004.  Another $25 billion in tax receipts will be lost if Bush prevails on his plan to eliminate dividend taxes.  That’s over $100 billion.  You would think that the Bush administration would have managed to cut at least that amount from the overall increase in spending.  They didn’t.

As I have written previously, I am in favor of tax cuts.  But I am also for smaller government, or at least a significant slowdown in the rate of growth in government.  Democrats, on the other hand, are all for big government and ever-increasing social programs.  Even though the Republicans now control the White House and the Congress, they did not choose to reduce or slowdown the rate of growth in non-defense spending overall. 

The result is that the deficit could hit $400 billion next year.  The national debt will increase by over $1 trillion over the next 4-5 years.  This will have negative effects on the investment markets.  The US dollar declined 11% in 2002 and is likely to fall even further in light of the deficit outlook.  At some point, interest rates (especially bonds) will have to rise in order to keep foreign investors buying our debt.  This is not a pretty picture! 

I’m sure I will get criticized for these comments, probably by folks on both sides of the political aisle.  But I am genuinely disappointed that President Bush and his advisors do not take the deficits more seriously.

I will now get off my soapbox and turn to some really good news.

Bush’s New Savings Plans Proposal

Anyone who has tried to sock away some money for retirement, college educations for their kids, or for a new home have run into a myriad of regulations, forms, restrictions and confusion.  Should you do a traditional IRA, 403(b), 401(k), medical savings account, 529 college savings plan, or just give up and just sock the money away in your mattress?

Along with the new budget, President Bush has proposed new tax-free savings plans that would not only increase the amount you can put back for various needs, but would also simplify the maze of different types of accounts and regulations governing each.  The three new plans are called Employer Retirement Savings Accounts, Lifetime Savings Accounts, and Retirement Savings Accounts.

Employer Retirement Savings Accounts

One of the major reasons that more employers do not provide retirement benefits is the current regulatory maze surrounding qualified retirement plans.  It seems that every time Congress meets, new laws are passed that add another layer of complexity or reporting to these plans.  This makes the administrative costs of providing such a plan prohibitive for many employers.

The Bush proposal would consolidate 401(k), thrift, 403(b), and governmental 457 plans, as well as employer-sponsored SARSEP and SIMPLE IRA programs into Employer Retirement Savings Accounts, or ERSAs.  Contributions to these plans would still be tax-deductible and earnings would continue to grow tax-deferred.  Withdrawals at retirement would continue to be taxed as ordinary income.

Administration of the new ERSA plans would be similar to current 401(k) administrative requirements, but greatly simplified.  Like 401(k) plans, employees would be allowed to contribute up to $12,000, increasing to $15,000 by 2006.  Employers will also be able to continue to match employees’ contributions as in the past.

Lifetime Savings Accounts

Lifetime Savings Accounts (LSAs) could be established for any purpose, including children’s or grandchildren’s education, a new home, healthcare needs, or funds to start a new business.  Individuals will be able to make non-deductible contributions of up to $7,500 per year (indexed for inflation), or $15,000 per married couple.  There is no age or income cap on the ability to participate in these programs, so many parents may actually set up LSAs for their children to accumulate funds for college.  Best of all, funds can be withdrawn from an LSA for any purpose at any time with no penalties or taxes on the earnings.

Retirement Savings Accounts

The final type of new account is called a Retirement Savings Account (RSA).  This will allow individuals to salt away another $7,500 per year ($15,000 per couple) into an account that is set-aside for retirement.  RSAs would be governed by rules similar to those for current Roth IRAs, in that contributions would not be tax-deductible, but individuals will be able to participate regardless of their income.  Currently, high-income individuals cannot contribute to a Roth IRA.

Earnings will grow tax-deferred, and can be withdrawn tax-free after age 58, or upon the death or disability of the account holder.  Existing Roth IRAs would simply be converted into the new RSA.  Existing traditional IRAs could be converted into an RSA, again without any income limitations.  Any traditional IRA not converted to an RSA would not be able to accept new deductible contributions, but would be able to accept rollovers from another plan.

Examples Of The New Savings Plans

Here are some examples of how much you can set aside under the new savings plans proposed by President Bush.   For this example, we’ll assume a single taxpayer less than 50 years of age:

Employer Retirement Savings Account:

$12,000*

Lifetime Savings Account

 7,500

Retirement Savings Account

7,500

______

Total:  

$27,000

 *  Does not reflect any employer matching contribution









For a married couple, the amounts could be doubled ($54,000), assuming that both participate in an Employer Retirement Savings Account.  Individuals over age 50 are permitted to make “catch-up” contributions of $2,000 per year to an Employer Retirement Savings Account, making the total allowable contribution $29,000.

As discussed above, the $12,000 contribution to the ERSA is tax-deductible, but contributions to the LSA and RSA are not. 

When announcing the new plans, the Treasury Department said that these accounts would “make saving simple for everyone and for every purpose…No longer will people have to worry about the endless maze of confusing rules.  The two simple accounts will have one powerful goal making saving for everyday life and retirement security easier and more attractive.” 

I’m for anything that makes saving simpler and easier!

Best Wishes,

Gary D. Halbert

SPECIAL ARTICLES

More information on the new savings/retirement plans.

The Bush administration’s “spin” on the new budget.

The Democrats’ “conniption” over the budget & tax cuts
(Warning - several assertions & numbers are incorrect.)

John Glenn speaks about re-entry from space.

Buzz Aldrin on astronauts’ fears.


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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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