Scenarios: Next steps in fight over spending, debt limit

WASHINGTON (Reuters) - Budget talks to win an urgently needed increase in government borrowing authority have entered a "new phase," the White House said on Thursday.

This comes after the two Republican lawmakers in Vice President Joe Biden's bipartisan working group walked out on Thursday.

Even though progress was made, they said they could not agree to Democrats' demands for tax increases and additional economic stimulus being included in a package.

Here are some possible next steps Congress and the White House could take to avoid a default on August 2, when the Treasury Department estimates it will run out of ways to manage government debt without a credit limit increase:

RETURN OF OBAMA-BOEHNER-REID

In April, President Barack Obama, House of Representatives Speaker John Boehner and Senate Majority Leader Harry Reid brokered a deal to trim about $38 billion in spending. A late-night compromise averted a government shutdown.

Now, the three are expected to reunite to avoid a Treasury Department default on debt.

"I think it's in the hands of the Speaker and the President and, sadly, probably me," Reid quipped at a news conference.

There's been no word yet, however, on when the Republican and two Democrats will hold their first meeting.

Biden could play a role as well, just as he did in the final negotiations over the earlier $38 billion spending cuts.

OPTIONS FOR 3 AMIGOS

The Biden group supposedly agreed to more than $2 trillion in savings, which could meet Boehner's demand for one dollar of deficit reduction for every dollar of debt-limit increase.

Obama-Boehner-Reid could try to achieve even more in savings or they could tinker with the line-by-line spending cuts the Biden group tentatively negotiated.

But the three likely will spend most of their time fighting over whether Medicare savings should be included, as Republicans desperately want, or whether any sort of tax increases should be part of the mix, as Democrats want.

Republicans say there can be no increase in tax rates, such as raising taxes on the wealthy.

Democrats counter that the elderly and poor should not carry the full weight of deficit reduction, and the wealthy and big corporations should shoulder some of the burden.

When push comes to shove, it's unclear whether Republicans would walk away from a deal if it includes tax changes such as repealing an ethanol blenders credit, expanding a payroll tax cut or allowing the repatriation of some corporate profits at a lower tax rate as part of an economic stimulus move.

A RE-ENERGIZED FIVE GUYS

A group of six Republicans and Democrats in the Senate had been working on a mix of tax increases and spending cuts, including to Social Security and Medicare programs, to achieve around $4 trillion in deficit-reduction over a decade.

The group's work fizzled when one of the Republicans, Senator Tom Coburn, dropped out.

Now that the Biden group has apparently disbanded, there's some speculation the remaining five senators will intensify their efforts for a long-term deal.

One of the members, Senate Budget Committee Chairman Kent Conrad, told reporters the group might have input into a two-step process leading to legislation achieving a "downpayment" on deficit-reduction followed by a longer-term fiscal package.

But Reid threw cold water on that idea.

"My honest feeling is I think we're beyond gangs of five and gangs of six," he said.

THE TIMELINE

August 2 is the hard deadline.

But Obama and Boehner have said they want to wrap it up earlier to keep financial markets confident of U.S. credit-worthiness.

Many congressional observers think it will go down to the wire though, given the complexity of the discussions and the high political stakes, namely the fiscal soundness of the U.S. economy and the 2012 presidential and congressional elections.

OTHER SIDESHOWS

Republicans in the House will push a balanced budget constitutional amendment, with conservatives saying its passage is a precondition for voting "yes" on a debt limit increase.

Even if it were to pass the House, its prospects in the Democratic-controlled Senate are poor.

Democrats tout a repeal of an oil industry tax break as a deficit-reduction step. But that would only save about $21 billion over a decade -- small potatoes in a country with a $14.3 trillion debt.

(Reporting by Richard Cowan, Editing by Sandra Maler)