Katrina Relief? Just Put It on the Tab!

How will Washington pay for the damage wrought by the hurricane? The same way it pays for everything else these days: By borrowing

By Howard Gleckman

In the wake of Hurricane Katrina, and with a wary eye on Hurricane Rita as she churns through the Gulf of Mexico, lawmakers are looking at a staggering short-term bill -- well in excess of $100 billion. Those costs, plus another $100 billion for Iraq, will put major short-term pressure on the federal deficit. And some lawmakers are insisting that hurricane relief should be paid for, either by cutting government spending or raising taxes.

Senator John McCain (R-Ariz.) wants to dump the massive new Medicare drug benefit, which seniors are scheduled to start signing up for in November. House conservatives want to kill about $24 billion in individual highway projects that were included in this year big transportation law. The White House says Congress should approve its proposals to trim Medicaid spending. Democrats want to roll back the Bush tax cuts on capital gains and dividends. And everybody wants to cut government waste.

It isn't going to happen. Oh, Congress may nip some here and tuck a bit there. Some lawmakers may offer to delay a construction project or two -- only for a year, mind you. But a GOP Congress isn't going to raise taxes. Pols won't trim Medicaid. Indeed, they'll expand the program to help hundreds of thousands of homeless and jobless people on the Gulf Coast.


  And Medicare? Bush not only won't delay the program, the White House is planning a splashy rollout of the plan within the next few days. It is, Bush strategists figure, their best chance in weeks to distract the public from the unrelenting run of grim news -- from New Orleans to Baghdad. Trouble is, every time the White House gets ready for Bush's big announcement, another hurricane pops up on the radar screen.

Of course, some costly Bush initiatives are floundering. His effort to permanently repeal the estate tax has gone aground. His multi-trillion dollar plan to remake Social Security has long since sunk beneath the waves. But abandoning ideas that would have increased deficits is not the same as paying for unexpected short-term costs.

How much will Katrina really cost? No one knows. Lawmakers have approved $62 billion so far, though only about $15 billion has been spent. Hill insiders never bought into the projections of $200 billion, but they do think $150 billion is in the ballpark.


  Nearly all of that sum will be spent in fiscal year 2006, which begins on Oct. 1. That would drive the '06 deficit to somewhere in the neighborhood of $500 billion.

Bush aides insist that a temporary boost in spending is not important, and that it can be easily financed. The bond markets have so far agreed. They had a brief fit of nerves on Sept. 16, the day after Bush said he'd spend "whatever it takes" to fix up the Gulf Coast, and bond yields spiked. But they have settled down since.

If long-term interest rates stay low, Congress will have little incentive to pay for Katrina. A huge stimulus pumped into the economy in 2006 -- an election year, don't forget -- will actually make many incumbents happy. So while some fiscal conservatives will continue to insist that Washington pay its bills for once, they're doing little more than shouting into the teeth of a hurricane.

Gleckman is a senior correspondent in BusinessWeek's Washington bureau

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