http://news.bbc.co.uk/2/hi/business/3603923.stm

The cost of the Iraq war: One year on

Analysis By Steve Schifferes

BBC News Online economics reporter

The US Congress has so far allocated $162bn on invading and then rebuilding Iraq. That

sounds like a lot - but the real question should be whether it is anywhere near enough. The Bush administration was very clear about the need to invade Iraq - even though some of

those reasons are now looking less convincing.

But it was far less straightforward about how much the military operation to unseat Saddam

Hussein would cost.

And even more questions remain about the ultimate cost of rebuilding a functioning economy

and civil society in Iraq.

COST OF THE WAR

US military operations so far: $143bn *

Military operations (projected): $150bn-300bn

Reconstruction so far: $33bn (US $18.7bn) *

Reconstruction (projected): $50bn-100bn

Extra security: $40bn-80bn Sources: CBO, CSIS, World Bank

* allocated for US fiscal years 2003-05

Clearly, for the advocates of the war, its economic costs were not the central consideration.

Nevertheless, the war and its aftermath could have a significant effect on the US goverment's

growing budget deficit, and therefore potentially on the US economy.

Military costs

According to the Congressional Budget Office, a non-partisan body set up by the US Congress,

the war and occupation of Iraq by 130,000 US troops costs about $4bn-5bn (£2.2bn-2.7bn) per

month, or $48bn-60bn per year.

Many experts now believe that US troop levels of this magnitude may be needed for the next 3-5

years, in contrast to earlier plans to reduce troop levels to below 100,000 this year.

“ Like a teenager who gets further in debt on a credit card, the Bush administration is

racking up costs that will have to be paid in the future in higher taxes or lower government

programs ”

Professor William Nordhaus, Yale University

According to Bathsheba Crocker, of the Centre for Strategic and International Studies in

Washington, this is causing considerable strain on the US military's troop deployments overseas.

But she thinks that is unlikely, given the uncertain security and political situation, that the US

could expect significant additional troops from Nato to reduce its burden.

Instead, the US is having increasingly to mobilise the part-time soldiers in the National Guard to

serve in Iraq, which has its own costs of economic disruption.

Overall then, the occupation could cost more than double the cost of the war, adding between

$150bn-300bn to the $150bn that has been appropriated so far by Congress.

Avoiding the deficit

The Bush administration has chosen to finance the war by off-budget emergency supplemental

appropriations, rather than include Iraq spending in the budget sent to Congress.

It was only after the war began, on 25 March 2003, that President Bush asked for $75bn extra to

pay for the initial costs of the war.

And it was more than six months later before the next supplemental appropriation, for another

$87bn, was made.

That has reduced the political flack over appropriations for the war - and has also meant that the

war spending does not formally count as part of the budget deficit in the future.

And that deficit is predicted to exceed $500bn this year.

According to economics professor William Nordhaus of Yale University, these costs are "a

significant burden on the federal budget, another straw on the camel's back".

"The major problem is the Bush administration's unwillingness to face up to the need to finance

any of the additional costs, whether the war in Iraq, homeland security, or most important of all

the new Medicare provisions," he says.

"Like a teenager who gets further in debt on a credit card, the Bush administration is racking up

costs that will have to be paid in the future in higher taxes or lower government programs.

"The fiscal irresponsibility is really awesome."

Paying for reconstruction

In its latest war appropriation in November, the US Congress also added $18.7bn in

reconstruction aid to rebuild Iraq's shaky infrastructure - $2bn less than the administration

requested.

But just as with the military spending, this is unlikely to be "the last word on the subject",

according to Ms Crocker.

The cost of reconstruction, she says, is also rising as the security situation deteriorates, as firms

and the US military have to provide a higher level of security for each reconstruction project.

In the autumn of 2003, the UN and the Coalition Provisional Authority estimated that $55bn was

needed to restore Iraq's economy to its pre-war level.

At a pledging conference in Madrid in October a number of countries added to the US

contribution, but in total the amount raised ($33bn) fell far short of Iraq's needs.

Again, it is likely that the US taxpayer will have to make up this shortfall of some $20bn,

especially as many other pledging countries gave money in form of loans, rather than grants.

CBO estimates suggest that another $50bn-100bn might be needed to pay for reconstruction and

security over the next 3-5 years.

Oil wealth

Some Congressmen have argued that Iraq's huge potential oil wealth means that the country

should be able to finance its own redevelopment rather than relying on the US.

In the long run, oil experts estimate that Iraq could increase its production from the current 2.5

million barrels per day to 6 million barrels if new oil fields are developed.

That would increase government revenue from oil of about $15bn to about $40bn - enough to

allocate at least $20bn to rebuilding.

But the problem is that it would take 5-10 years, and perhaps $25bn, to develop these fields.

And any deals with international oil companies for investment would require a stable security

situation and a legitimate government capable of signing long-term contracts.

These conditions are unlikely to be realised before 2006, according to Mohammed Ali Zainy of

the Centre for Global Energy Studies in London.

Thus in the short term, rebuilding and protecting the oil fields, which is costing $2bn-4bn per

year, will still have to be paid, while the benefits of greater oil output won't happen this decade.

Debt problems

And any attempt to get Iraq to pay its own costs of reconstruction faces another problem - the

huge debts it incurred under Saddam Hussein.

The interest payments alone amount to an estimated $80bn to $120bn (with an equal or greater

amount due as reparations to Kuwait after the first Gulf war.)

If these debts are not cancelled, then most of the future oil revenues will end up paying them off.

But US attempts to get the main creditors, including Russia, France and Germany, to reduce the

debt burden, have met a stony response.

Oil price rise

Oil prices have risen steadily during the period of the war and are now higher than in many

years.

Despite this, Opec has decided to cut oil production further, this time backed by Saudi Arabia,

despite strong pressure from the US.

Could the instability in the region be influencing the other Middle East oil producers to try and

keep prices high?

If so, this could cause the most economic damage of all, with developing countries the most

vulnerable.

According to Professor Nordhaus, "there is the prospect that generalised anger with the US could

spill over into use of the oil weapon in the near future".

An economic model by Oxford Economic Forecasting suggests that higher oil prices could hurt

developing countries most.

But they would lead to a quicker revival of the Iraqi economy itself, and therefore bring the self-

financing of reconstruction closer by a fewer years.

War on terror

The biggest unknown of all is how the Iraq war has affected the war on terror - a subject of fierce

debate at the moment.

If it could be shown that it added to the difficulties of the war on terror, then that would be a

substantial economic cost as well.

It is not only the cost of extra security (around $40bn-80bn in the US alone yearly), but there is

also the fact that world trade has been disrupted, and world economic growth slowed, by worries

over terrorism.

A recent report by the International Monetary Fund warned that further terrorist attacks could

destabilise the world's financial markets and threaten global economic recovery.

That would be a very high cost indeed.

Story from BBC NEWS:

http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/3603923.stm

Published: 2004/04/08 07:13:32 GMT

© BBC MMX