A 'state of the union' fight ahead over US government spending

How furiously to cut government spending is likely to be a major point of departure between Obama, who gives the State of the Union address on Tuesday, and congressional Republicans.

With Republican Rep. Paul Ryan facing off against President Obama over the "state of the union" next Tuesday, the stage is set for a night that could reveal the shape of political battles to come.

At issue: Are Americans best served by a federal government that goes on a strict spending diet, or should the path toward fiscal discpline be more gradual and less focused on shrinking the size of government?

Both men agree that America's current path is unsustainable – that persistently high budget deficits at some point will imperil the economic security and dynamism.

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But Mr. Obama is expected to argue Democrats' case for the gradualist approach, with an eye on government's ability to make economy-enhancing investments, not simply BE a millstone around the neck of the private sector.

Congressman Ryan of Wisconsin, whom Republican leaders named Friday to give their party's televised response to the president's State of the Union speech, will take up the case for deep cuts in government spending as an aid to economic growth. He became a rising star in his party not for charisma but for his energetic forays into the weeds of the federal budget, conservative principles in hand.

One night of dueling visions won't settle the debate, but it will help frame it. Moreover, the battle lines drawn Tuesday are likely to be important for some time to come. Washington appears to be entering an era when difficult budget realities – and the interplay between government policies and job creation – are top-of-mind concerns for voters.

House Speaker John Boehner framed this point through a Republican lens in announcing the selection of Ryan on Friday.

“We’re broke," Mr. Boehner said, "and decisive action is needed to help our economy get back to creating jobs and end the spending binge in Washington that threatens our children’s future."

Democrat Peter Orszag, until recently Obama's budget director, emphasized the nation's fiscal peril in a Financial Times opinion article the same day. "If policymakers will not act before we have a fiscal crisis at the federal level, a fiscal crisis we will ultimately have." He warned that tremors of such a crisis could erupt in financial markets this year, triggered perhaps by a debate in Congress over whether or not to lift the national debt "ceiling."

In the long run, federal politicians are under pressure to figure out how best to rein in health-care costs, adjust Social Security for continued solvency, and reform the tax code and the budget process in a sustainable way. A bipartisan fiscal commission, which Obama created and on which Ryan served, recently showed both the possibility of finding consensus and the political difficulty of getting votes for middle-ground positions.

A majority of commission members endorsed a plan that included broad spending cuts, entitlement reforms, and a bid to keep taxes from rising higher than 21 percent of gross domestic product.

In the near term, the debate over federal finances may revolve around more mundane questions of spending – how much to cut from discretionary programs, and whether additional spending in some areas will aid job creation.

According to some news reports citing people familiar with Obama's upcoming address, the president plans to call for new spending on education and infrastructure. On Friday, Obama announced that General Electric CEO Jeffrey Immelt will head a new Council on Jobs and Competitiveness, to come up with ideas designed to get unemployed Americans back to work faster.

Republicans, meanwhile, have ramped up their pitch for spending cuts. The Republican Study Committee, a group representing about two-thirds of House Republicans including Ryan, this week outlined a proposal for $2.5 trillion to be slashed from discretionary federal programs over the next decade.

Liberal critics say Republicans' goal of cutting at least $100 billion from nonsecurity discretionary programs this year would slash prominent programs – from education to food safety – by about 40 percent. The Center for Budget and Policy Priorities also argues that the plan "would remove substantial purchasing power from a weak economy, thereby costing hundreds of thousands of jobs and raising risks of a double-dip recession."

For both parties, the stakes are high as they position themselves to woo voters in the 2012 presidential campaign. Polls show a public that's very worried about deficit spending, and that doesn't like the idea of Congress allowing itself to borrow more money by raising the official debt ceiling. But Americans also say jobs are the top priority.

Economists are also divided over the right fiscal course. Many see cutting federal deficits as a high priority but are also wary of moving immediately – at a time when a post-recession jobs recovery is still in its early stages.

Republicans argue that their spending cuts, while costing government jobs, will unlock money that can be better used to create employment in the private sector.

While Obama and Ryan will occupy the limelight Tuesday, an important arbiter of the spending debate will be the closely divided US Senate, which occupies a middle ground between the president and the Republican-controlled House of Representatives.

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