As Democrats and Republicans in Washington debate spending cuts in order to reign in the deficit, the empty threat of a government shutdown continues to make headlines.
While President Obama has created his own plan for spending cuts, Republicans deem it insufficient to adequately manage the mounting deficit. While some Republicans refuse to rule out a government shutdown, others are adamant in their stance that further spending cuts need to be made before March 4, when the government would effectively run out of money .
Obama is reluctant to concede to Republican demands citing a threat to the slow economic recovery if spending is cut too much. With the Bush-era tax cuts extended for the next two years, the federal government cannot rely on increased tax collections in the short term. Although this is a legitimate concern, it is likely that spending cuts will boost confidence in the government and the general economy, and thus not threaten the recovery but enable it further.
The U.S. is under scrutiny on an international level as well because much of its deficit is financed abroad, with China holding the majority of the debt. As Benzinga readers already know, Speaker of the House John Boehner has said that Obama’s plan will be ineffectual; jobs destroyed, and taxes and borrowing will be too high.
While the job outlook and tax levels may be a matter of opinion, there is evidence that borrowing is too high. U.S. Treasury Secretary Timothy Geithner told the President that interest expense will rise from 1.3% of gross domestic product (GDP) to 3.1% by 2016.
This might also be a matter of opinion, but tripling the interest expense is not likely to be seen as a move in the right direction by the American public or government spending hawks.
Prediction: In the end, Republicans will swallow their pride and concede to Obama’s spending cut plan as is, because in reality, a government shutdown would hurt their wallets too.
— Gary Cassady
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