WASHINGTON President Barack Obama and Senate Democrats are weighing a scaled-back U.S. budget deal that would avert a looming default but force Congress to tackle the politically toxic issue again before the 2012 elections, a Senate Democratic aide told Reuters on Thursday.
The deal would cover the country's borrowing needs for seven months, the aide said. That would theoretically include budget savings of roughly $1 trillion to attract the Republican support needed to pass it through Congress.
Congress must raise the $14.3 trillion debt ceiling by August 2 to avoid a default that could push the United States back into recession and send financial markets plummeting.
There has been no progress since talks collapsed last week over tax hikes. Democrats say spending cuts should not be the only component of a deficit-reduction package that would make it easier for lawmakers to sign off on further borrowing.
The White House believes a deal needs to be in place by July 22 to give Congress enough time to pass it, according to Democratic officials familiar with the talks.
Bank regulator Sheila Bair said markets could be spooked well before August 2 if they see no signs of progress.
"Why even go there? Why even flirt with it?" Bair, the outgoing chairman of the Federal Deposit Insurance Corp., told the Senate Banking Committee.
Senate Democratic Leader Harry Reid canceled a planned break during the week of the July 4 Independence Day holiday to keep the Senate in session at Obama's request.
"We're working on a number of different proposals," he told reporters. "We discussed four of them with the president yesterday."
A seven-month extension is one of those options, the aide said. With the country borrowing roughly $150 billion per month, that would require a debt-limit hike of roughly $1 trillion. Negotiators had tentatively agreed on at least that amount of spending cuts before talks collapsed.
Other Democratic officials familiar with the talks threw cold water on the idea, saying it would be a "grave mistake" to opt for a short-term solution that could unnerve markets. They denied that the White House had seen such a plan.
'A STAY OF EXECUTION'
A short-term deal could weaken the dollar and push up Treasury yields if investors and debt-rating agencies conclude that Washington does not have the stomach to confront its fiscal ills.
"A temporary increase is just a stay of execution. They will have to make these difficult decisions at some point," said Ward McCarthy, a top economist at Jefferies & Co.
Other ideas that Democrats are considering include a bigger deal that would extend U.S. borrowing authority through 2012, which would probably require more than $2 trillion in budget savings over 10 years. Another option would include longer-term spending cuts totaling $4 trillion.
Democrats said they expected to hear soon from House of Representatives Speaker John Boehner, the top Republican in Congress, over the general elements that would be possible in a deal. Boehner aides said there was no firm offer on the table.
A short-term deal could divide Republicans.
Senate Republican Leader Mitch McConnell raised the possibility of a short-term deal several weeks ago, but the No. 2 Republican in the House, Eric Cantor, shot down the idea.
Democrats have stepped up their attack in recent days, challenging Republicans to defend tax breaks for corporate jets, race horses and yachts that benefit the wealthy that they want to close as part of the deal.
Democratic Senator Jeff Merkley called the racehorse tax break the "bluegrass boondoggle" in a slap at McConnell, whose home state of Kentucky is famous for horse racing.
"Giving Triple Crown treatment to millionaires while workers are put out to pasture, that's not right and it's not the American way," Merkley said, referring to thoroughbred racing's Triple Crown series of races.
Democrats are also pushing job-creation measures like new construction spending that could complicate the budget talks by adding hundreds of billions of dollars to budget deficits.
Democratic Senator Charles Schumer said Republicans are blocking job-creation efforts in order to pin the sluggish economy on Obama in the November 2012 elections.
"Republicans aren't just opposing the president any more," Schumer said at the Economic Policy Institute, a liberal think tank. "They are opposing the economic recovery itself."
Republicans said the tax hikes Democrats want would worsen the 9.1 percent jobless rate.
"When the president talks about raising taxes, he's talking about killing jobs," said Republican Senator Jon Kyl.
Budget deficits in recent years have hovered near their highest levels relative to the size of the economy since World War Two. The deficit for the current fiscal year, which ends September 30, is projected to hit $1.4 trillion.
(Additional reporting by Alister Bull, Dave Clarke, Thomas Ferraro, Donna Smith and Deborah Charles in Washington and Ellen Freilich in New York; Editing by Anthony Boadle)