Campaign promises in limbo as credit crisis worsens

By Pedro da Costa and Claudia Parsons - Analysis

NEW YORK (Reuters) - Lofty promises from U.S. presidential candidates of lower taxes and healthcare for all are looking more like pipedreams as the cost of dealing with the banking sector's collapse passes the $1 trillion-mark.

At the same time, smart leadership and thoughtful resource allocation could determine not only how quickly the economy recovers but the extent of long-term damage to the national budget, analysts said.

The next U.S. president will take office in unenviable conditions, facing an economy that will most likely be stuck in recession, and an unusually bad one at that. He will have to make tough decisions about an unpopular war. And he will jostle with a financial system turned upside down.

Ironically, the current U.S. administration's handle on the situation will also lay the groundwork for whether any future government, under either John McCain or Barack Obama, is able to implement the policies touted on the campaign trail.

"A lot of it is going to depend on the extent of the stabilization that we see prior to 2009," said Conrad DeQuadros, senior economist at RDQ Economics in New York.

"Subdued economic growth will result in subdued revenue growth and we're potentially going to see a substantial widening out of the budget deficit."

Indeed, the Congressional Budget Office estimates the U.S. budget deficit will swell to record levels next year, rising to $438 billion.

But this is where the issue of priorities comes in. The war in Iraq is a case in point. The country was already mired in a deficit when the war started, and yet the administration found the means, through debt, to fund the operations.

A reversal of that pattern could help the next president.

"What both candidates would be hoping for is some relief with military spending stemming from a broader stabilization of the situation in the Middle East," said Peter Ireland, economics professor at Boston College. "If that happened, it is true that there would be more funds for other things."

HEALTH AND TAXES

The two central proposals that might come under threat from each campaign are also potentially their costliest ones: Obama's plan to extend healthcare coverage to every American and McCain's effort to maintain George Bush's tax cut program.

The Democratic senator from Illinois has promised a major overhaul of the U.S. health insurance system that his campaign estimates will cost $50 billion to $65 billion. He says he will pay for that by rolling back tax cuts on Americans making more than $250,000 a year.

McCain, for his part, has vowed to keep the Bush tax cuts in place and reduce corporate income tax rates to 25 percent from 35 percent. His tax plans have been estimated to cost some $400 billion a year.

In both cases, the presidential hopefuls have ratcheted expectations that some fear might not be fully met.