The US budget and current account deficits. Twin peaks - or perhaps twin icebergs? As he enters his second four years in the White House, George Bush may find himself paying for some of the profligacy of his first term. He has promised to halve the federal budget deficit - now around 3.6 per cent of GDP and growing - but has given little idea of how he will achieve this.

And the picture is complicated by the even larger current account balance of payments deficit - largely accounted for by the excess of US imports over exports. This is now over 5.5 per cent of GDP and rising. Both deficits are a symptom that the US is living beyond its means. For the rest of the world, this indicates that the US economic engine may slow and that the dollar is set to remain weak - the question is whether these trends will lead to a gradual lowering of the deficit, or whether things will come to a crunch.

Few countries have as active an interest in this as Ireland, with much of our living made by acting as a bridgehead for US companies entering Europe. The statistics are familiar. There are 570 US companies here, employing more than 90,00 people directly with annual exports exceeding $37 billion. The US is also our largest single overseas market, accounting for 20 per cent of export sales in the first seven months of this year. While it is impossible to quantify exactly, investment and growth by US companies was a key factor driving the Tiger economy and remains central to our economic future.

Little wonder, perhaps, that the Taoiseach, Mr Ahern, expressed some relief that the Kerry proposal of changing the tax treatment of US subsidiaries abroad was not going to become a reality. Whether it would have even if the Democrat got in is open to question. He had promised to tax the profits US companies earned overseas, ending their current ability to defer such liabilities by keeping the money offshore. The workability of such a plan was very much open to question and Kerry never specified in detail how it would work.

Mr Ahern's statement - and his readiness to lobby against such a measure - is telling nonetheless. If the US multinational sector were to sneeze for any reason, Ireland's economic health would be in question. Fortunately we have benefited over the past year or so from a pick-up in inward investment from the US and from expansions by companies already based here. The outlook remains broadly favourable for such investment in the short term, notwithstanding the increased competition from lower-cost locations and the well-rehearsed pressure for Ireland to move into more skilled areas of manufacturing and services.

The more pressing issue looking out over the next four years of the Bush presidency is whether the imbalances in the US are going to damage growth prospects in the world's biggest economy. Given our reliance on the US, this is an important question for our own economic prospects in the medium term.

The link between the two deficits is that they both broadly indicate that the US is living beyond its means. The government is spending more than it raises in revenue. And the current account deficit reflects demand from US consumers which exceeds their earning capacity. Reflecting both deficits, US national savings are low.

The apocalyptic view of events is easy to paint. It goes something like this. The current account deficit continues to grow, requiring more and more international investment into the US, which is already consuming some 80 per cent of world savings.

Huge capital investment into the US - much of it from Asia - is currently the counterpoint to the current account deficit. For some reason - perhaps a big dollar drop - investors lose confidence in US assets. The Federal Reserve has to push up interest rates to keep attracting in capital and this slows growth and adds to pressure on the budget deficit. This is the theory peddled by those such as Morgan Stanley economist Stephen Roach, who argues that the US economy is "an accident waiting to happen."

So far, of course, such a nightmare scenario has failed to materialise. The US dollar has weakened significantly - dropping again yesterday as post-election reality set in - but investment into the US financial markets has continued. The US Federal Reserve Board has been able to take a gradual approach to raising interest rates, which may continue with another increase next week. And US economic growth is respectable, even if fears about the buoyancy of the jobs market will lead to a close focus on today's employment figures for October.

The benign scenario is that a gradual dollar decline and a slowdown in US consumption leads to a gradual closing of the current account gap. And that Bush II takes a more responsible approach to budgeting. This will involve reneging on promises to make recent income and capital tax cuts permanent, or finding other revenues in the tax system And, with defence spending set to remain high and Iraq a burden on the US exchequer, spending cutbacks would have to focus on health and welfare, which would do little to improve the lot of the less well-off.

For the moment all the signs are that Mr Bush will stick to his "growth will cure it" strategy, arguing that lower taxes will spur growth and help to cut the budget deficit. This may have worked in Ireland, but the tax cuts here were in the context of an already-booming economy. Mr Bush may not be as lucky, unless the other big world economies show an unexpected surge in growth and take some of the pressure off the US to act as engine of growth.

It is anyone's guess which scenario will play out - a sudden and disruptive shock or a gradual and not too harmful adjustment. (In many ways it is a similar debate to that about the future of the Irish property market). What is certain, however, is that slower US growth will be required to close the current account deficit and that some budgetary retrenchment will be needed to close the fiscal gap. In laying out his programme yesterday, Mr Bush highlighted the need to reform social security, set to come under pressure from an ageing population.

And it is odds on that the policy of the first Bush administration of benign neglect towards the US currency will continue and that further weakness in the currency is a distinct prospect. By boosting US exports and making it more attractive for its citizens to buy home-produced products, a weaker dollar should help close the current account gap.

The big deficits point to a weaker dollar and slower US growth. The dollar has already fallen sharply, as evident from the graph above, putting pressure on many Irish companies selling into that market - witness the fortunes of Waterford Wedgwood.

Let's hope the adjustment to come is a gradual one and that the environment for US investment here and Irish exports there can continue to support our growth prospects.