Debt talks to speed up, taxes still a hurdle

WASHINGTON Fri Jun 10, 2011 10:17am EDT

Capitol Dome is pictured behind a cherry blossom tree in Washington, March 24, 2011. REUTERS/Hyungwon Kang

Capitol Dome is pictured behind a cherry blossom tree in Washington, March 24, 2011.

Credit: Reuters/Hyungwon Kang

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WASHINGTON (Reuters) - Top lawmakers aiming to reach a deficit-reduction deal agreed on Thursday to step up the pace of their talks with a series of meetings next week but said they still disagreed over the need to raise taxes.

Vice President Joe Biden and six leading Democratic and Republican lawmakers have now met a half-dozen times as they try to work out their differences and reach a deal to reduce trillion dollar budget deficits.

Thursday's Capitol Hill meeting took place amid growing pressure at home and abroad for an agreement that would let Congress raise the $14.3 trillion debt ceiling before an August 2 deadline, when the Treasury Department has warned it will run out of money to pay the nation's bills.

So far, bond markets remain placid, reflecting investor expectations that a deal will come before August. But Wall Street has stepped up warnings that the picture could change as the deadline draws near and some lawmakers talk of forcing a brief default on debt to secure deeper spending cuts.

In the past few weeks, three major credit rating agencies have warned they may downgrade the ratings on Treasury bonds if the debt and deficit standoff is not resolved soon. Moody's said it wanted to see substantial action by mid-July.

Many on Wall Street fear that even the briefest default by the United States would sink the dollar and spike interest rates sharply higher, tipping a fragile economy back into recession. Under the most dire scenarios, some predict it could spark financial market panic on a scale not seen since the 2008 collapse of the Lehman Brothers investment bank.

The slow-moving talks, hampered by entrenched positions on both sides, yielded little progress on the hot-button issue of raising taxes.

Republicans argued that tax increases would hurt the struggling economy and hamper job-creation efforts, while Biden said they need to be considered because the budget gap is so wide, according to a congressional aide.

Asked if Republicans had shown a willingness to consider tax increases, Democratic Representative Chris Van Hollen, one of the negotiators, told reporters, "I can't say that would be true, no."

But he said the group, which had not met for two weeks, had agreed to meet three times next week.

House of Representatives Speaker John Boehner, the top Republican in Congress, and senior Democrats have complained the Biden talks have been moving too slowly for a deal to be reached before August 2.

Conscious of the potential for market chaos if there is not a deal soon, President Barack Obama and Boehner have both said they would like to get a deal within a month.

WEAK DATA HURTS

But the Biden group is hampered by recent weak economic data that show a slowdown in manufacturing and stubbornly high unemployment. Each side has used the weak data to stiffen its own position, further widening the gulf between Republicans and Democrats on how to spur growth.

The group will consider spending caps at its next meeting, according to a congressional aide.

House Republican leader Eric Cantor said the recent poor economic news underscored the importance of the meetings.

"We believe that many of the problems surround the lack of job creation and growth in this country have to do with the fact that there isn't a credible plan to manage down the debt and deficit in this country," he said. "That's what we're trying to produce here and we had much substantive discussion today and look forward to more next week."

Van Hollen said Democrats wanted to ensure that spending cuts would not be as steep in the near future as in later years, to avoid harming the sputtering economic recovery.

"We've made it clear that is definitely a factor in these discussions," Van Hollen said. "We don't want anything to harm the fragile economy."

Top Republicans have said any increase in the debt ceiling would have to be matched by an equal amount of spending cuts -- roughly $2 trillion -- to ensure Congress will not have to revisit the issue before the November 2012 elections.

Many Republicans say Treasury can keep markets happy even if the debt limit is not raised by August 2, by ensuring that it prioritizes debt service above other obligations like federal salaries and benefit payments -- a prospect that alarms the White House.

"If the debt limit's not increased, it doesn't mean we'll default. It means we'll prioritize payments to interest payments and bond renewals first. So I think there's no risk we're going to default on anything," Republican Senator Tom Coburn told Reuters Insider.

The international community is watching closely.

An adviser to China's central bank said this week he hoped lawmakers would "stop playing with fire." China, the largest foreign creditor to the United States, holds about $1 trillion of the United States' outstanding debt.

Opinion polls show Americans deeply worried about the deficit, which is expected to reach $1.4 trillion this year.

An ABC/Washington Post poll released on Thursday showed most Americans think the government should reduce deficits now, not after the economy improves and they support doing that by both cutting spending and raising taxes.

(Additional reporting by Richard Cowan, Donna Smith; Editing by David Lawder and Peter Cooney)