Battle lines harden in budget talks

WASHINGTON (Reuters) - Battle lines hardened in the debate over the budget on Tuesday as Republicans lined up behind a demand for deep spending cuts and Democrats floated a new plan that would raise taxes by trillions of dollars.

The two sides appeared further apart than ever as President Barack Obama's administration launched an intensive round of talks with lawmakers to avoid an unprecedented debt default.

Vice President Joe Biden met with top lawmakers from both parties to try to find common ground on a budget deal that would give the legislators the political cover they need to sign off on an increase in the country's $14.3 trillion debt ceiling, which will be reached on Monday.

"We are making real progress," Biden told reporters after the meeting. "Whether we get to the finish line with this group is another question."

With the 2012 election campaign already under way, politicians are eager to win over voters who say they are concerned by the mounting U.S. debt but put off by the tough choices needed to close stubborn budget deficits that have averaged 10 percent of gross domestic product in recent years.

The Biden-led talks kicked off on a relatively amicable note last week after Republicans said controversial elements like healthcare and taxes would be off the table.

But House of Representatives Speaker John Boehner, the top Republican in Congress, dispelled any notion that reaching an agreement would be easy when he unveiled a tough new yardstick, in a speech to Wall Street on Monday, that would require spending cuts to exceed any debt-limit increase.

With the United States borrowing roughly $125 billion each month, Boehner's approach calls for cuts that would dwarf the $38 billion saved in a separate budget deal last month. The Treasury Department has said a hike of $2 trillion is needed to last through the November 2012 elections.

A majority of Wall Street bond dealers and money managers say spending cuts alone cannot solve the U.S. budget problem and tax increases must be part of the solution.

In a Reuters survey conducted on Tuesday, 17 out of 29 of fund managers and economists representing major Wall Street bond dealing firms said the Republicans' favored option of spending cuts alone would not a work.

Boehner has said tax increases are off the table, while Obama wants to raise taxes on wealthier Americans.

SHORING UP THE RIGHT FLANK

Boehner must shore up his right flank to prevent further defections from lawmakers aligned with the fiscally conservative Tea Party who rejected that deal last month.

Top Republicans quickly lined up behind his new plan. "We are going to be talking about trillions, not about billions," said Senate Republican Leader Mitch McConnell.

Democrats say any deal to get the long-term debt under control must boost tax revenue by raising taxes on the rich or reducing tax breaks and loopholes that add up to $1 trillion each year.

Senate Budget Committee Chairman Kent Conrad floated a plan on Tuesday that would rely equally on tax increases and spending cuts to save $4 trillion over 10 years, according to lawmakers and aides.

Conrad has yet to publicly release his proposal, but it would represent a dramatic shift from the previous three-to-one ratio of spending cuts backed by the White House.

Senate Democrats also said they would bring up a bill that would repeal tax breaks enjoyed by the five biggest oil companies, seeking to harness public anger at high gas prices. Republicans said that would send gasoline prices higher.

In a highly polarized political environment, consensus that would lead to substantial savings may be hard to achieve. Though both sides could agree to cuts in some areas, their areas of disagreement carry a much higher dollar figure.

Aside from the Biden-led group, which includes six lawmakers from the House and the Senate, Obama is scheduled to meet with senators on Wednesday and Thursday, and could meet with House lawmakers next week.

The U.S. Treasury says it can draw on other pots of money until August 2 to avoid a default, which would cause turmoil in markets and economies worldwide. Congressional aides say they don't expect a deal until at least July.

So far, markets have shown no signs of concern. Benchmark 10-year Treasury bonds are yielding 3.21 percent -- well below their 30-year average of 6.75 percent.

China, which holds more than $1 trillion in U.S. debt, did not raise concerns about the U.S. budget in a meeting of high-level Chinese and U.S. officials on Tuesday, a senior Treasury official said.

(Additional reporting by David Morgan, Jeff Mason, Donna Smith, Kim Dixon, Emily Stephenson, Doug Palmer, Thomas Ferraro and Steve Holland in Washington and Chris Reese and Emily Flitter in New York; Editing by Christopher Wilson)