WASHINGTON — The spending cuts approved by House Republicans would act as a drag on the U.S. economy, according to a Wall Street analysis that added new pressure to a raging political debate in Washington.
The report by the investment company Goldman Sachs said the cuts would reduce the gross domestic product by up to 2 percentage points this year, essentially cutting in half the nation’s projected economic output for 2011.
The report, prepared for the company’s clients, represents the first independent economic assessment of a congressional budget fight that could lead to a government shutdown as early as next week.
Nonetheless, Republicans are unlikely to retreat from their insistence on more than $60 billion in reductions in federal spending as a condition of continuing funding for the government through the rest of 2011.
A spokesman for House Speaker John Boehner of Ohio said the Goldman report represented “the same outdated Washington mindset,” comparing it to the thinking behind the 2009 Recovery Act that released federal funds to counter the effects of the recession.
But Democrats quickly seized on the report as a validation of their arguments against the Republican cuts.
“Just as the economy is beginning to pick up a little steam, the Republican budget would snuff out any chance of recovery,” said Sen. Charles Schumer, D-N.Y.
Congressional Democrats and Republicans are near deadlock on the spending issue, with their positions hardening this week.
Democrats have rejected the $61 billion in reductions that affect every state and virtually every domestic aspect of federal government operations as too severe. Instead, they have proposed a temporary spending freeze as they negotiate deeper cuts.
Congress must pass a spending bill by March 4, when a stop-gap funding measure expires, to avoid a shutdown. But House Republican leaders are under pressure from their energized conservative base not to give in.
An aide familiar with talks under way between congressional leaders said that House Republicans have indicated they cannot compromise on the level of the cuts, heightening the possibility of a shutdown in a matter of weeks. The aide described the talks on condition of anonymity because of their sensitivity.
“They’re saying they can’t go back to the caucus with anything less,” said the aide. “If they went through a shut down… then the caucus would at least feel they tried.”
Boehner’s spokesman rejected that characterization, saying Senate Majority Harry Reid, D-Nev., has only proposed a spending freeze.
“It’s up to Sen. Reid to tell Americans what — if anything — he’s willing to cut,” said the spokesman, Michael Steel. “At this point, the House has done its work by passing a (continuing resolution), and the Senate has done nothing.”
The Goldman Sachs analysis said the cuts would reduce the country’s economic output by between 1.5 percentage point and 2 percentage points for the year.
A smaller budget reduction of $25 billion reduction, if approved as a compromise, would have a lower effect, reducing GDP by 1 percentage point. The effects would fade over time, the report said.
“Fiscal drag is quickly emerging as a focus,” the Goldman report said. The report said the spending cuts are “the most important near-term risk.” The report concluded that while a government shutdown would result in an additional hit, but regarded that outcome as less likely.
While politicians reacted quickly to the findings, the view among economists was mixed.
“It would be a meaningful hit to GDP this spring and summer,” said Mark Zandi, chief economist at Moody’s.com, who has advised Republicans and Democrats.
Zandi said he would prefer spending cuts next year, as the economy shows further signs of improvement. “I just wouldn’t do anything that would forestall that kind of job creation that we need,” he said.
But Douglas Holtz-Eakin, a former director of the non-partisan Congressional Budget Office, who has advised Republicans, said the projections were overestimated.
“It’s way too high,” he said. He estimated the drag on domestic output from the House-approved cuts at no more two-tenths of 1 percent.
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