July 9 (Bloomberg) -- President George W. Bush and congressional Democrats are headed for their first showdown over the federal budget. For both sides, more than money is at stake.

Bush, who only vetoed one piece of legislation passed by the Republican Congress in his first six years in office, is now threatening to reject almost every spending bill sent to him by the Democratic-controlled Congress unless lawmakers abandon plans to spend $23 billion more than he requested.

While the amount involved is less than 1 percent of the $2.9 trillion federal budget, the political stakes are greater. A little more than 16 months before the 2008 elections, Democrats and Republicans alike figure a fight may be in their interests.

``It's a very big fight over a fairly small sum of money,'' says Bob Bixby, executive director of the Concord Coalition, an Arlington, Virginia-based nonpartisan group that advocates a balanced budget. ``It has a lot of political significance in terms of the signals being sent.''

Bush and the Republicans, stung by criticism that they presided over a surge in government spending, are looking to rehabilitate themselves among core supporters by holding the line on the budget. Democrats, meanwhile, are trying to show they can deliver on promises to shore up education, health care and a host of other initiatives.

More Than Expected

Other consequences might only become clear over time. The additional spending proposed by the Democrats would barely affect a deficit the Congressional Budget Office says might exceed $220 billion next year, though it may end up costing more than expected if it causes agency budgets to grow faster over time. Bush, 61, has pledged to put the budget on course to be balanced by 2012. The deficit in 2006 was $248 billion.

Unlike other measures such as the immigration legislation that died last month in the Senate, the annual spending bills must pass to keep the government's doors open. And neither Bush nor the Democrats are eager for a repeat of the budget fights of 1995, when the federal government partially shut down twice after President Bill Clinton refused congressional Republicans' demands to pare taxes and spending by hundred of billions of dollars.

Still, with both sides spoiling for a fight, there's a chance things could spin out of control. ``This is going to be a very serious showdown,'' says Stephen McMillin, deputy director of Bush's Office of Management and Budget. ``The differences could not be more stark.''

`A Hell of a Difference'

House Appropriations Committee Chairman David Obey, a Wisconsin Democrat, dismisses the administration's veto threats. His party's budget, he says, will ``make a hell of a difference in people's lives, but it has virtually no difference on the deficit.''

The fight will unfold during the coming months as Democrats begin sending Bush the 12 annual spending bills, and may consume much of the rest of this year's legislative agenda.

It will play out at the margins of the federal budget, as the vast majority of spending has become politically all but untouchable. Defense and homeland-security spending, entitlements such as Social Security and Medicare, and interest payments on the national debt now consume more than 80 percent of the government budget.

The remainder pays for domestic programs ranging from the space program to national parks and must be approved annually by Congress. Bush submitted a plan in February that would cut spending on those programs by 0.3 percent, according to a Congressional Budget Office estimate.

Falling Short

Democrats say the proposal falls short of what's needed just to maintain current services, and want to spend 5 percent more, with much of the increase slated for education, veterans and health-care programs.

Democrats say the proposed increase is the minimum needed to shore up programs eroded by a dozen years of Republican budgets.

``We're not making humungous new investments,'' says Obey, 68. ``I've never had anybody in my district say, `Why don't you guys get your act together and cut cancer research?'''

The Republicans, he says, are attempting to block the new spending because they've ``blown the budget sky-high and now are looking for a way on the cheap to recover their image.''

Since Bush took office in 2001, federal spending has increased 32 percent, and the budget is now equivalent to 20.3 percent of gross domestic product, the most since 1996.

Pet Projects

The Republicans' control of Congress, which ended in November, was marked by an explosion in pet-project spending, the creation of a costly prescription-drug entitlement program and a string of budget deficits that peaked at $413 billion in 2004. House Minority Leader John Boehner, an Ohio Republican, says there's a need for the party to re-establish its credibility with fiscal conservatives.

``For Republicans, who have a tarnished fiscal- responsibility image in the last election, it gives us an opportunity to show people that we really are who we said we are,'' Boehner, 57, said in an interview. ``We're here for a smaller, less costly and more accountable government.''

Each side has taken steps that may escalate the battle.

The Bush administration replaced OMB Director Rob Portman, who had good relations with Democrats, with a former congressman from Iowa, Jim Nussle, 47, who has a reputation for partisan combativeness; he once appeared on the floor of the House with a paper bag over his head to protest an ethics scandal involving Democrats.

`Belly-Bumping'

Obey called Nussle's appointment to the budget job an ``act of confrontation,'' saying the administration is replacing someone ``who at least talks the moderation game with someone who has been a belly-bumping, hard-line conservative for a long time.''

Senate Democrats have raised the specter of difficult confirmation hearings for Nussle.

``A number of members have spoken with me about their very real concerns about his nomination,'' says Senate Budget Committee Chairman Kent Conrad, 59, a North Dakota Democrat. They've ``expressed serious reservations about Mr. Nussle's reputation for confrontation.''

Conrad said in a statement July 5 that he ``anticipates'' that Nussle's confirmation hearings will take place this month. Sean Kevelighan, the OMB spokesman, said last week that Nussle wouldn't be available for comment until he is confirmed.

In his weekly radio address July 7, Bush urged Congress to confirm Nussle, who he said would ``be a strong advocate for protecting our tax dollars here in Washington.'' Bush also renewed his threat to veto any appropriations measure that contains the ``failed tax-and-spend policies of the past.''

Policy Changes

The Democrats, meanwhile, have laced the spending bills with policy changes that they know the White House won't accept. On June 21, one day after Bush vetoed legislation expanding federal support of embryonic stem-cell research, Democrats attached similar provisions to a health-care spending bill. They ignored his promises to veto any legislation loosening federal abortion restrictions, passing a foreign-aid spending bill that would allow the government to provide contraceptives to organizations that actively support abortion rights.

Other changes would relax trade restrictions with Cuba and extend employment benefits to homosexual partners of federal employees. Each has drawn a separate veto threat.

Bush and the Republicans ``should hope'' the Democrats stoke the conflict even more, says Patrick Toomey, a former Republican congressman from Pennsylvania who heads the Club for Growth, a Washington-based group that backs small-government candidates.

``The only way Republicans are going to make progress'' this year ``is if the president vetoes the bills and has high- profile fights over spending,'' he says. ``It's very, very important that they have this fight.''

To contact the reporters on this story: Brendan Murray in Washington at brmurray@bloomberg.net; Brian Faler in Washington at bfaler@bloomberg.net

Last Updated: July 8, 2007 20:51 EDT