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S-Chip Battle: Will Outcome Echo Through 2008 Campaign?

The battle between the White House and Congress over S-Chip--the acronym for a state-federal children's health program--is a fascinating showdown that is playing out on multiple levels. It's partly about ideology and partly about political strategy. It's partly about health care and partly about spending.

Bush this week reiterated his intention to veto the $35-billion S-Chip expansion that Congressional Democrats are preparing to send him. He has suggested a $5-billion expansion. That difference reflects Bush's philosophic reluctance to expand government-provided health care (though he overcome that reluctance to keep his 2000 campaign pledge to expand Medicare to to cover prescription drugs), which he regards as a step toward "socialized medicine." Democrats see it far differently, reasoning that expanding existing programs is the most practical way to quickly address the problems of millions of uninsured Americans.

As a political matter, the two side make completely different calculations. Democrats see health care as not only Americans' second priority after the Iraq war, but also a signal Republican vulnerability. They welcome Bush's veto as a chance to deepen the hole the GOP has dug for itself on domestic issues.

But the White House sees a chance to dig out of a different hole: the anger from the political right, reflected in Alan Greenspan's public criticism of GOP leaders, over Bush-era excesses in federal spending. Special interest earmarks are part of it; the Medicare prescription drug program is part of it; so were various farm and transportation bills.

But whatever the cause of the problem, the White House sees an S-chip veto as part of the solution--a high profile, cut through the clutter method of demonstrating that there are lines on spending that Bush will not cross. Re-energizing small government conservatives is an important Republican priority.

In the end, there will be a deal--too many governors of both parties, and congressional incumbents on the ballot in 2008, want it to happen. But first there will be a political confrontation whose outcome could echo through next year's campaign.

Questions? Comments? Write to politicalcapital@cnbc.com.