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U.S. Business As fiscal deadline looms, U.S. faces crucial weekend

Barack Obama says ‘Obamacare’ will not be part of negotiations for avoiding a government shutdown.

DOUG MILLS/NYT

American lawmakers once again have put their country on the edge of a fiscal precipice, and this time – depending on the outcome of high-stakes negotiations this weekend – the United States actually could topple over it.

The U.S. government's current fiscal year ends at midnight Monday and legislators are nowhere near agreeing on a new budget for the fiscal year that begins Oct. 1.

That's not unusual: The Democratic-controlled Senate and the Republican-led House of Representatives haven't agreed on a 12-month fiscal plan in years. Instead, they've passed a series of temporary measures called continuing resolutions that authorize departments to spend as they had been previously.

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Every vote on a continuing resolution has been accompanied by varying degrees of political drama; yet, the process has achieved what Democratic Senator Patty Murray on Friday called the "absolute bare minimum" of governing: It kept the lights on.

Despite the hyper-partisanship that has characterized President Barack Obama's tenure, Democratic and Republican leaders have managed to avoid a government shutdown. That counts for something, as lawmakers have failed that test 17 times, according to research by Kevin Logan, chief U.S. economist at HSBC in New York. The last government shutdown was in 1996.

However, it's possible Congress this time has backed itself into a corner. Lawmakers failed to bridge their differences this week, setting up a legislative showdown this weekend that will test investor tolerance for uncertainty when markets reopen on Monday.

The Senate on Friday voted 54-44 in favour of a bill that would keep current spending measures in place until the middle of November. But that margin of victory belies the complexity of the situation. The Senate vote Friday actually was a rejection of the House's suggested continuing resolution, which would have funded all government operations with the exception of Mr. Obama's signature health care initiative.

Senate Majority Leader Harry Reid stripped the health provisions from the spending bill, which now goes back to the House because it was rewritten. Mr. Reid vowed to keep doing so until his counterpart in the House of Representatives, Speaker John Boehner, sends him a "clean" piece of legislation.

"The only way to solve this problem is to accept what we've done," Mr. Reid told reporters. If the House returns a bill with new conditions, "we'll send it back to them stripped of all the craziness," he said.

Investors have been eyeing the latest political shenanigans in Washington with a certain amount of wariness. Stocks in the U.S. ended the week slightly lower, despite relatively stronger economic data.

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History suggests there's little reason to overreact, since lawmakers have a pattern of striking an agreement at the 11th hour.

At the same time, a government shutdown that lasts only a few days would have little impact on the broader economy. IHS Global Insight economist Nariman Behravish estimates that closing the government for a week would shave two-tenths of a percentage point off economic growth. "It's not a disaster, provided it doesn't go on very long," Mr. Behravish told reporters on a conference call this week.

The risk this time is the politics have grown more intense. In effect, Mr. Boehner is facing two options: Co-operate with his Democratic opponents, or continue to try to assuage the restive Tea Party wing of his Republican caucus.

Mr. Boehner was scheduled to convene House Republicans Saturday to decide on a strategy with no obvious way out. Joining with Democrats to keep the government open would break the Republicans' cherished convention of voting for nothing that isn't supported by its majority. The Tea Party's leaders, meantime, insist that the budget vote must be tied to measures that impede "Obamacare," a non-starter with Democrats.

"That's not going to happen," Mr. Obama told reporters Friday. The President said he was open to talking about measures that might "improve" health policy, but "that will not happen under the threat of shutdown."

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