Debt reduction talks in limbo as clock ticks toward Aug. 2 deadline

Talks among President Obama and congressional leaders Sunday evening failed to break a partisan stalemate over how to raise the federal borrowing limit, leaving the politically charged negotiations in limbo three weeks before the administration says the country will begin to default.

The White House meeting adjourned after roughly 75 minutes without agreement over how far the parties should go in cutting the deficit over the next decade or whether tax cuts and entitlement reductions should be a part of any deal. Congressional leaders will return to the White House on Monday to continue talks, administration officials announced, and Obama will hold a morning news conference before they do.

Both sides appeared Sunday to dig further into their positions, leaving the talks deadlocked, a historic default looming and a fragile economy increasingly vulnerable to the consequences of Washington’s entrenched partisanship and ideological divide over taxes and entitlements.

House Speaker John A. Boehner (R-Ohio) jolted the negotiations Saturday when he announced that his party would not support the larger deficit-cutting plan Obama has proposed because it includes tax increases, complicating the meeting’s agenda. According to a Democratic official familiar with the Sunday talks, Obama asked Republican leaders, “If not now, when?”

The enduring disagreement, drawn sharply along partisan lines as an election year approaches, brought warnings from the administration and congressional Democrats that, unless a deal is reached within two weeks — to give Congress time to approve it — the United States would default on its fiscal obligations for the first time.

Asked whether the parties could reach a deal in the next 10 days, Obama, flanked by congressional leaders in the Cabinet Room before the meeting, said simply, “We need to.”

The Democratic official said Obama, who began the session by recounting the nature of the compromise that had been under discussion before Boehner’s announcement, pushed for the larger plan throughout the meeting.

He reminded Boehner, the official said, that the speaker had admitted that a smaller deal could be just as difficult to push through Congress as a large one, and he challenged Republicans to return to the White House on Monday with a plan to secure the 218 votes needed for a measure to pass the House. Obama told the group to expect to meet daily until a deal is reached, said the official, who like others spoke on the condition of anonymity to discuss the private meeting.

“The president pushed to do something real and not just kick the can down the road,” said a senior administration official. “He said he was ready, willing and able to make the hard choices and hoped they would join him.”

Republican leaders, meanwhile, suggested that a “contingency plan” is in the works to raise the debt ceiling if the gulf between the parties could not be bridged. Obama has dismissed incremental steps, saying that now is the moment to address the underlying causes of fiscal imbalance.

After weeks of debate, Obama may have a tenuous hold on the political high ground as he takes on a more visible role, urging party leaders to set aside ideology to trim an estimated $4 trillion from the deficit over the next decade.

Obama’s political strategy since his party loss the midterm elections has been to portray himself as a reasonable man in partisan Washington, at times angering Republicans and Democrats in doing so.

His proposal, which he has said would bring certainty to an economy constrained by anxiety over the nation’s fiscal condition, would involve spending cuts to agency budgets, including the Pentagon’s; ending the George W. Bush-era tax cuts for the wealthiest Americans; and changing entitlement programs in ways his party has traditionally opposed.

Obama’s political advantage may fade quickly, though, if a deal cannot be reached before Aug. 2, the date the administration says the nation will begin to default on its obligations unless the borrowing limit is raised. Polls show that most Americans believe he has managed the economy poorly, and the unemployment rate’s jump to 9.2 percent in June has raised alarms within a White House looking toward reelection in 2012.

Lawmakers in both parties have refused to lift the $14.3 trillion debt limit unless the measure is accompanied by a strategy to sharply curtail borrowing.

The budget request Obama submitted to Congress in February would have required about $9.5 trillion in fresh borrowing by 2021. Under his current proposal, the debt would continue to rise, by roughly $5 trillion over the next 10 years. It would stabilize, however, as a share of the overall economy and eventually begin to fall by that measure.

“If they don’t act, then we face catastrophic damage to the American economy. And the leadership, to their credit, and I mean Republicans and Democrats, fully understand that,” Treasury Secretary Timothy F. Geithner said Sunday on NBC’s “Meet the Press.”

Boehner had been an enthusiastic partner in drafting such a deal.

But he is facing strong pressure not to accept any tax increase from a class of recalcitrant Republican House freshmen, as well as from some GOP presidential candidates, including Rep. Michele Bachmann (Minn.), who has vowed not to vote for any increase in the debt limit.

Republicans found themselves on the defensive Sunday after Boehner pulled the plug on talks with the White House, citing his conservative rank and file’s opposition to the tax increases Obama is demanding in exchange for significant changes to federal entitlement programs.

Appearing on “Fox News Sunday,” Senate Minority Leader Mitch McConnell (R-Ky.) called the White House proposal “a terrible idea” and “a job killer” at a time when the unemployment rate is rising.

After the meeting, Don Stewart, McConnell’s deputy chief of staff for communications, said in a statement, “It’s baffling that the president and his party continue to insist on massive tax hikes in the middle of a jobs crisis while refusing to take significant action on spending reductions at a time of record deficits.”

The Republican position sent negotiators back to the drawing board. Boehner, for one, has suggested reexamining the smaller measure that had been under discussion in bipartisan talks led by Vice President Biden. The approach aimed to reduce borrowing by about $2.4 trillion over the next decade.

Boehner, House Majority Leader Eric Cantor (R-Va.) and Sen. Jon Kyl (R-Ariz.) pushed during the Sunday meeting for an agreement of roughly that size, according to the Democratic official.

“The speaker told the group that he believes a package based on the work of the Biden group is the most viable option at this time for moving forward,’’ said a Boehner aide. “The speaker restated the fundamental principles that must be met for any increase in the debt limit: spending cuts and reforms that are greater than the amount of the increase, restraints on future spending, and no tax hikes.’’

The Biden approach has problems as well, and aides in both parties questioned whether it offers a realistic path to compromise. Negotiators were still struggling to meet the $2.4 trillion goal when the talks broke up over taxes. Aides in both parties said a consensus had formed around only about $1.5 trillion in savings.

Of that, a little more than $1 trillion came from agency budgets. The parties were hung up over Democratic demands for a “firewall” between domestic and military spending, which would guarantee that the Pentagon shares in the pain of any agency cuts, as well as Republican concerns that Democrats were offering minuscule reductions in 2012 and 2013.

The rest of the savings were split about evenly between health programs — primarily Medicare and Medicaid — and other direct-payment programs. Negotiators were also considering changes to Social Security, such as using a different measure of inflation that would have the effect of reducing payouts.

But absent GOP agreement on a Democratic request for as much as $400 billion in tax hikes on the wealthy and corporations, Democrats were reluctant to put the popular entitlement program on the table.

Without Social Security changes and tax increases, aides in both parties said, it had proved virtually impossible to push savings up to the Biden goal. Returning now to that framework may present not only problems of mathematics but political problems as well, said Ed Lorenzen, a budget analyst for the Obama fiscal commission who now works with the bipartisan Committee for a Responsible Federal Budget.

For example, Lorenzen said, farm state lawmakers may have been willing to absorb a big hit in a package that aims to solve the nation’s budget problems. But, he said, “it will be harder to sell deep ag cuts if the perception is that farm subsidies make up a disproportionate share of the smaller deal.”

Although his party and the White House appear far from an agreement, McConnell pledged Sunday to raise the federal debt limit in time to avert a default.

“Nobody is talking about not raising the debt ceiling. I haven’t heard that discussed by anybody,” McConnell said, adding that he would describe a “contingency plan” later this week if a deal isn’t reached.

Republican aides declined to discuss that plan, but McConnell has in recent weeks suggested that even the Biden framework is too ambitious and that lawmakers may need an alternative that cuts spending by a modest amount in exchange for a much shorter increase in the debt ceiling.

White House Chief of Staff William M. Daley and Geithner said on the Sunday talk shows that Obama remains committed to achieving the large deal he has outlined.

“He’s not someone to walk away from a tough fight. This is a very tough political fight, no question about it,” Daley said on ABC’s “This Week.” “But he didn’t come to this town to do little things. He came to do big things.”

Daley called Boehner’s abandonment of a broad deal “unfortunate,” adding that “everyone agrees that a number around $4 trillion is the number that will . . . make a serious dent on our deficit.”

Staff writers Zachary A. Goldfarb, Paul Kane and Dan Balz contributed to this report.

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Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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