Q+A: State of play in debt and deficit talks

WASHINGTON Sat Jul 9, 2011 2:09am EDT

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WASHINGTON (Reuters) - Budget talks between President Barack Obama and top Republicans enter a critical phase this weekend as they try to end a standoff over raising the government's borrowing limit.

The talks are aimed at striking a deal to slash the long-term deficit, which Republicans say is needed to secure their support for increasing the $14.3 trillion debt limit.

The Treasury Department has warned that if Congress does not raise the debt limit by August 2, the United States will run out of money to fully pay its bills, triggering "catastrophic" economic consequences and possibly another recession.

The federal budget deficit -- essentially the government's annual overdraft -- is expected to hit $1.4 trillion this year and stay in the trillion-dollar range for years. The federal debt is the government's total accumulated borrowing. The U.S. government borrows about $125 billion each month.

HOW CLOSE ARE THEY TO A DEAL?

The White House, Republicans and Democrats have been negotiating since May to try to strike a deal on budget savings to clear the way for a debt limit rise but have repeatedly hit an impasse over the issue of taxes.

Republicans have said any deal to cut long-term deficits should involve "trillions" of dollars but have insisted that those savings come from spending cuts alone. Democrats demand that any deal must involve a combination of both spending cuts and increased revenue, either through tax hikes or closing tax loopholes, or both.

Negotiations led by Vice President Joe Biden collapsed in June when Republicans walked out over Democrats' demands that increased revenues be part of a deal, although significant progress was made in those sessions, with more than $1 trillion in savings identified.

Obama and House Speaker John Boehner, the top Republican in Congress, stepped in to lead continued negotiations. On Thursday, the president met leaders from both parties to try to decide on the size of a budget-cutting package. Both sides are aiming for more than $2 trillion in savings, and as much as $4 trillion, over a period of 10 to 12 years.

The hard part begins in a second meeting on Sunday, when they tackle the difficult question of how those savings will be achieved -- and the thorny issue of taxes will once again take center stage.

After the talks on Thursday, Obama said the sides were still far apart on key issues. His spokesman, Jay Carney, said he was not prepared to predict a deal on Sunday.

Boehner believes the prospects for a deal in the next few days are "50-50", according to a Republican Party aide.

Further complicating talks was a dismal jobs report on Friday that will likely harden each side's positions. Democrats will use it to argue that too many spending cuts will endanger a fragile recovery. Republicans will say tax hikes will further destroy job growth.

WHAT ABOUT A SHORT-TERM DEAL?

Some members of both parties have suggested that with the August 2 deadline so near, and the issue of taxes so troublesome, Congress should authorize a short-term debt limit rise -- perhaps to allow government borrowing until the beginning of next year -- to buy more time for a bigger deal.

They say the two sides could agree on a budget cutting deal of about $1 trillion in spending cuts -- those identified in the Biden talks -- with a commensurate rise in the debt limit. That would allow the U.S. to pay its bills for about another eight months.

But Obama insists he will not sign onto a short-term deal. Only a debt limit rise of more than $2 trillion will meet the country's borrowing needs through the November 2012 presidential election.

Anything less will mean having to confront such a controversial debt limit vote in the midst of congressional and presidential election season -- and at a time when voters are concerned about spending and debt.

WILL THE TEA PARTY BACK A DEAL?

Even if Obama and Republicans reach a deal, it will likely face opposition from dozens of lawmakers aligned with the conservative Tea Party movement -- especially if it includes revenue increases.

To push a deal through the House, Boehner is going to need Democratic help. But Obama is already facing a backlash from House liberals over his willingness to discuss cuts to the Social Security retirement program and Medicare, the government-run health insurance program for the elderly.

With opposition from both Left and Right, even if party leaders strike a deal it will still need much work to garner the necessary votes in Congress to get it passed.

WHO HAS THE MOST AT STAKE IN THE TALKS?

There are considerable risks on all sides. If Boehner fails to get a "yes" vote in the House to raise the debt limit, Republicans will likely be blamed -- in the short-term at least -- for the economic turmoil that will follow.

Many economists predict that a default by the United States will trigger panic in the bond markets, a spike in interest rates across the economy, with investors dumping the dollar en masse, and another recession.

Yet Obama is widely seen as the steward of the economy and another recession will likely doom his chances of re-election.

ARE THE MARKETS WORRIED?

For now bond markets are calm, but that could change very quickly if talks collapse. Three credit ratings agencies have said that the U.S. could lose its coveted AAA credit rating if no deal emerges and the debt limit is not raised.

(Editing by Christopher Wilson)

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