U.S. Shutdown Unlikely, But Budget Battle Remains

01.03.2011 -

A deal to avert a U.S. government shutdown took shape in Congress on Monday, but the short-term spending measure would do nothing to resolve the bitter debate over federal spending.

As lawmakers returned from a weeklong break, budget-cutting Republicans pressured President Barack Obama's Democrats to accept a proposal to trim $4 billion over the next two weeks by eliminating programs that Obama has also targeted.

"This week, Democrats will have an opportunity to show that they've gotten the message," Senate Republican leader Mitch McConnell said. "They can show they agree the time has come to change the status quo."

With government funding due to expire on Friday, Congress must act this week to avert a shutdown of everything from bankruptcy courts to passport offices.

The Republican-controlled House of Representatives is scheduled to vote on the measure on Tuesday.

Republicans have made spending cuts their top priority after winning big in last November's elections on a promise to scale back the government and trim a massive budget deficit.

Democratic lawmakers were largely mum on the proposal as they weighed their options, but several indicated over the weekend the Republican plan could be acceptable. The White House said a shutdown was increasingly unlikely.

"We think we're moving in the right direction," White House spokesman Jay Carney said on Monday.

The proposal would buy more time for lawmakers to agree on funding levels for the rest of the fiscal year, which ends on Sept. 30.

But it gives little clarity for financial markets, military contractors, local governments and millions of ordinary citizens who are wondering how they will be affected by a budget fight that is likely to dominate Washington this year.

MF Global analyst Chris Krueger said budget-cutting Republicans, spurred on by Tea Party fiscal conservatives, now have the upper hand in that fight. "The question is not whether to cut, but how much," he wrote in a research note on Monday.

Though Republicans lost the battle for public opinion after a budget standoff led to a shutdown in 1995-1996, a survey released on Monday by The Hill newspaper, which covers Congress, showed that more voters say they would now blame Democrats, by a margin of 29% to 23%.

"We don't want to see a government shutdown, because the American people don't," House Republican Leader Eric Cantor said in a news conference. "They want to see the cutting of spending taking place just as they are doing in their businesses and households."

Democrats warn that the $61 billion in cuts House Republicans approved earlier this month - roughly 25% of the government's non-military operations for the remainder of this fiscal year - would deliver a body blow to the fragile economic recovery at a time when unemployment is at 9%.

Goldman Sachs estimated last week that the Republican plan, which passed the House on Feb. 19, would trim economic growth by up to two%age points this year.

Obama told state governors on Monday that everyone should be ready to sacrifice to help tackle a federal budget deficit that is projected to hit a record $1.65 trillion this year, equal to 10.9% of the economy.

700,000 Fewer Jobs?
Economist Mark Zandi, who has advised congressional leaders of both parties, estimated that the Republican proposal would lead to 700,000 fewer jobs by the end of 2012.

"Significant government spending restraint is vital, but given the economy's halting recovery, it would be counterproductive for that restraint to begin until the U.S. is creating enough jobs to lower the unemployment rate," Zandi wrote.

The deal indicates that leaders from both parties might be able to work together constructively on budget issues - but it remains to be seen whether rank-and-file Republicans who have pushed for the deepest cuts will go along, said David Kendall, a senior fellow at the centrist think tank Third Way.

"What's really at stake is whether Republican leadership can lead its own party," Kendall said.

Republican Representative Michele Bachman, a favorite of conservative Tea Party activists, will support the measure, a spokesman said.

The House is scheduled to vote on the measure on Tuesday after a sharply restricted debate - a contrast to the free-wheeling debate that preceded their earlier budget vote.

The Senate is likely to pass the bill without changes, a senior Republican Senate aide said.

Lawmakers will then have to agree on spending levels for the rest of the fiscal year even as they begin work on a budget for fiscal 2012, which starts on October 1. A vote to increase the government's borrowing authority also will likely prove contentious.