GOP spending plan would cost 700,000 jobs, new report says

By Lori Montgomery
Washington Post Staff Writer
Monday, February 28, 2011; 11:15 AM
A Republican plan to sharply cut federal spending this year would destroy 700,000 jobs through 2012, according to an independent economic analysis set for release Monday.

The report, by Moody's Analytics chief economist Mark Zandi, offers fresh ammunition to Democrats seeking block the Republican plan, which would terminate dozens of programs and slash federal appropriations by $61 billion over the next seven months.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year.

His report comes on the heels of a similar analysis last week by the investment bank Goldman Sachs, which predicted that the Republican spending cuts would cause even greater damage to the economy, slowing growth by as much as 2 percentage points in the second and third quarters of this year.

Zandi also had bad news for liberal Democrats who are resisting sharp spending cuts: Bringing deficits down to sustainable levels will require more than a growing economy. Even if the economy recovers as expected, he writes, lawmakers will have to cut about $400 billion a year through the rest of this decade to narrow the gap between spending and revenue, and stop adding significantly to the national debt.

"Significant government spending restraint is vital, but given the still halting economic recovery, it would be counterproductive for that restraint to begin until the economy is creating enough jobs to bring down the still very high unemployment rate," Zandi writes. "Shutting the government down for any length of time would also be taking a big chance with the recovery, not only because of the disruption to government services, but also due to the potential hit to the fragile collective psyche."

Lawmakers are facing a Friday deadline to approve a new measure to fund the government through the remainder of this fiscal year; the current funding bill is set to expire. Republicans insist the new measure should include deep cuts; Democrats say they are willing to cut spending this year, but not nearly as much.

A potential compromise emerged late last week, when House Republicans offered a stopgap measure that would keep the government operating through March 18 while cutting $4 billion from programs that President Obama has already identified as unnecessary. But even if that compromise passes the House and Senate this week, lawmakers are still sharply divided on funding for the rest of the fiscal year and beyond.

A partisan brawl is also brewing over the legal limit on government borrowing, currently set at $14.3 trillion. In his new report, Zandi predicts that the U.S. Treasury will be able to manage the government's finances under that cap only until June. With Republicans lining up against an increase, Zandi writes that the "threat of a serious policy misstep in the next several weeks and months" is serious.

But the potential fallout from such a misstep is also serious, Zandi writes, raising "the odds that policymakers will be able to come to terms." He concludes that the most likely scenario is "a political compromise" that raises the debt limit and "roughly splits the difference between the administration and House Republican proposals with spending cuts in fiscal year 2011 of closer to $30 billion."

"This isn't ideal fiscal policy, but the economic recovery will be able to manage through it," Zandi writes. "And if the compromise is reached relatively gracefully, it could send an encouraging signal that policymakers will be able to reasonably navigate the much more serious budget battles set to come."