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Mark Zandi: Short term budget deal only buys time

Newly elected U.S. Speaker of the House John Boehner (R-OH) holds up his gavel to the Republican side of the House during the opening session of the 112th Congress on January 5, 2011 on Capitol Hill in Washington, D.C.

TEXT OF STORY

JEREMY HOBSON: Now let's get to budget negotiations going on in Washington. Senate Majority Leader Harry Reid says he'll bring a bill to the floor of the Senate next week that would keep the government running for a month after the current funding bill expires next Friday. House Speaker John Boehner says he's open to a short term bill as long as it cuts some spending.

As for what happens beyond any short term extension, well, let's bring in Mark Zandi, chief economist at Moody's Analytics. He's with us live now for more on that. Good morning Mark.

MARK ZANDI: Good morning.

HOBSON: So what happens to the economy if they aren't able to come to an agreement and we get a government shutdown?

ZANDI: Well that would be bad. If would of course affect all the people who wouldn't go to work, it could affect people who rely on government checks, and perhaps most importantly of all, the longer it goes on it would begin to undermine very fragile confidence and confidence is key to this economy.

HOBSON: What if there are spending cuts instead and they are about to avoid a shut down, what would that do to our economic recovery?

ZANDI: Well, it would be a wait -- near term. The betting is that we'll see cuts somewhere close to $25-, $30 billion that take affect beginning in the second quarter of this year. And that could shave growth by as much as a percentage point. So it would weigh on growth. It would have longer lasting affects, but near-term it would be a negative.

HOBSON: All right, finally, Mark, what do you think is going to happen here?

ZANDI: I think they're going to come to terms. I think they'll figure out a way to split the difference. The House Republicans want to cut $60 billion from spending in the current fiscal year. I think we'll get $25- or $30 billion. And I think we'll find some happy resolution here. There really is no reason politically why we should see a shut down. I just don't think either party wants to go down that path.

HOBSON: Mark Zandi, chief economist at Moody's Analytics, thanks for your time this morning.

ZANDI: Thank you.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.
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