U.S. Shutdown Unlikely, but Budget Battle Continues

A bitter debate over the U.S. federal budget would only be postponed by a short-term spending deal taking shape in Congress that would avert an immediate government shutdown.

With government funding due to expire on Friday, lawmakers in the Republican-controlled House of Representatives and the Democratic-controlled Senate were expected this week to vote on a measure that would push the deadline back by several weeks.

That would buy more time for the two chambers to agree on funding levels for the rest of the fiscal year, which ends on September 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 impacted by a budget fight that is likely to dominate Washington this year.

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

But Scott Lilly, an analyst at the liberal Center for American Progress think tank, took the opposite view.

"The fact that it looked like the Republican leadership blinked for this two-week period I think leaves them in a somewhat weaker position," Lilly said on a conference call.

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

Republicans have been pushing for deep spending cuts to deliver on a campaign promise to rein in the federal government and trim the deficit.

Democrats warn that the $61 billion in cuts Republicans are seeking -- roughly 25 percent of the government's non-military operations -- would deliver a body blow to the fragile economic recovery at a time when unemployment is at 9 percent.

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

700,000 FEWER JOBS?

Economist Mark Zandi, who has advised congressional leaders of both parties, estimated that the Republican plan 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 outlines of a compromise emerged last Friday when House Republicans unveiled a measure that would cut spending by $4 billion over the next two weeks, roughly double the rate they had previously sought, but concentrate those cuts on programs that President Barack Obama supports eliminating.

Senate Majority Leader Harry Reid indicated that could be acceptable, and several other Democratic lawmakers over the weekend said they were somewhat optimistic a shutdown could be averted.

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

The House is scheduled to vote on the measure on Tuesday, and the Senate would act after that. It's unclear whether the Senate will accept the entire House proposal or seek to change it. Lawmakers were returning to Washington on Monday after a weeklong break.

Even if the stopgap measure passes, lawmakers will ultimately 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.

The U.S. government last shut down due to a budget standoff in 1995-1996, and Republicans are widely perceived to have lost that fight in the court of public opinion.

But a survey released on Monday found that more voters would blame Democrats than Republicans this time.

A survey released by The Hill newspaper found that 29 percent would hold Democrats responsible, 23 percent would hold Republicans responsible, and 43 percent would members of both parties responsible.

The cuts in question would largely fall on the 13 percent of the federal budget devoted to domestic discretionary programs like transportation and housing. Popular entitlement programs like Medicare that account for more than half of the $3.7 trillion budget would be untouched.