Congress Passes Spending Bill: GOP Wins First Round of Federal Budget Battle

For those investors keeping score at home, Republicans have won "Round 1" of the budget battle in Washington. But in the long run, all Americans may benefit if a government shutdown is averted.

Congress has just agreed to a Republican-crafted bill that contains $4 billion in budget cuts. The bill, if signed by President Obama, as is expected, will keep the U.S. government open until March 18, two weeks later than the original March 4 deadline, when the federal government runs out of money. This will give lawmakers more time to pass a budget for the current fiscal year and avoid a shutdown.

In policy terms, this represents an unqualified victory for the GOP because it points towards substantial, Republican-backed cuts in spending for the current fiscal year. Republicans argue their bill also reflects the view of most Americans, since the GOP recaptured a majority in the U.S. House of Representatives in last November's election.

Shaping the Debate

Although the two-week funding measure does not guarantee that Republicans and Democrats on Capitol Hill will agree on longer-term cuts and ultimately avoid a government shutdown, the stop-gap funding measure does suggest that the GOP is successfully structuring the debate in Washington. So far, the GOP has framed the budget issue as "spending cuts necessary to cut the deficit," successfully downplaying Democrats' claims that the cuts will eliminate needed services and programs, such as education, highway maintenance, and other discretionary programs.

Further, the Republicans' first victory in the debate war looks all the more impressive given that, as DailyFinance'sVishesh Kumar points out, spending cuts could hurt the U.S. economic recovery. And that's not the opinion of a liberal, Washington-based, think tank: Investment bank Goldman Sachs (GS) cited federal spending cuts as the most important near-term risk to the economic recovery.

More Cuts
on the Way

Congressional Republicans are likely to downplay, if not disregard, the Goldman Sachs analysis, and instead focus on the latest Government Accountability Office (GAO) government efficiency report as evidence that even more federal spending cuts are warranted. The GAO, the primary auditor of the federal government, found numerous duplicate and overlapping programs that are costing U.S. taxpayers billions of dollars.

"Reducing or eliminating duplication, overlap, or fragmentation could potentially save billions of taxpayer dollars annually and help agencies provide more efficient and effective services," the GAO wrote. However, the GAO did not place a dollar estimate on the cost of the program redundancies.

Coming Up Roses

The Republicans are clearly on the offensive, even headstrong. Is their confidence then rooted in popular support or is it an electorally dangerous overreach?

A recent survey suggests it's the former. A Washington Post-Pew Research Center poll, conducted from Feb. 24 to Feb. 27, asked Americans who they would blame if the parties couldn't agree on a budget and a government shutdown occurred.

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The poll found that 35% would blame President Obama, 36% would blame the Republicans -- a public opinion stance substantially different from the infamous 1995 government shutdown, when most Americans blamed the Republicans, not the president at the time, Bill Clinton, a Democrat. Republicans undoubtedly sense that fallout from a possible shutdown could hurt President Obama and the Democrats, too.

In short, right now everything is coming up roses for the Republicans. The party's November election victory has increased its power, and the latest polls show the American people view the budget stalemate as a two-party problem, not a GOP problem. If the GOP's current momentum continues, the new federal budget will reflect its priorities, not the Democrats'.

Even so, investors need to keep a proper perspective amid any Republican celebrations. An approved full-year budget would avert a potentially market-impacting, private sector-hampering government shutdown -- something that could hurt the nation more than budget cuts.
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