Report: GOP budget cuts would hit U.S. economy

Spending cuts approved by House Republicans would act as a drag on the U.S. economy, according to a Wall Street analysis that put new pressure on the political debate in Washington.

The report by the investment firm Goldman Sachs said the cuts would reduce the growth in gross domestic product by up to 2 percentage points this year, essentially cutting in half the nation’s projected economic growth for 2011.

The analysis, prepared for the firm’s clients, represents the first independent economic assessment of the congressional budget fight, which could lead to a government shutdown as early as next week.

Nonetheless, Republicans are unlikely to easily 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 the year.

A spokesman for House Speaker John A. Boehner of Ohio said the Goldman Sachs report represented “the same outdated Washington mind-set,” comparing it to the thinking behind the 2009 Recovery Act that released federal funds to counter the effects of the recession.

But Democrats 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 E. 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, which would 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 conservative base not to give in.

“They’re saying they can’t go back to the caucus with anything less,” an aide familiar with the negotiations between congressional leaders said on condition of anonymity because of the sensitivity of the talks. “If they went through a shutdown … then the caucus would at least feel they tried.”

Boehner’s spokesman rejected that characterization, saying Senate Majority Leader 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 says the cuts would reduce the country’s economic growth by 1.5 to 2 percentage points for the year.

A smaller budget reduction of $25 billion, if approved as a compromise, would have a lower effect, reducing growth by 1 percentage point. The effects would fade over time, the report says.

“Fiscal drag is quickly emerging as a focus,” the Goldman Sachs report says. It says the spending cuts are “the most important near-term risk.”

The report concludes that although a government shutdown would result in an additional hit, that outcome is 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 Analytics, who has advised Republicans and Democrats.

Zandi said he would prefer spending cuts next year, as the economy shows further 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 nonpartisan Congressional Budget Office who has advised Republicans, said the projections were excessive.

“It’s way too high,” he said. He estimated the drag on economic growth from the House-approved cuts at no more than 0.2 percentage point.

lisa.mascaro@latimes.com