* Democrats call for new stimulus
* Biden group pushes ahead in deficit-reduction talks
* CBO says benefits will swamp economy in long term
(Adds Baucus, other details)
By Richard Cowan and Andy Sullivan
WASHINGTON, June 22 Democratic leaders called
on Wednesday for new spending and tax cuts to boost the
sluggish U.S. economy, setting up a fresh hurdle for bipartisan
efforts to head off a government debt default this summer.
At the same time, a new report warned that the country
could face a European-style debt crisis unless Washington cuts
spending or raises taxes.
The report by the nonpartisan Congressional Budget Office
adds urgency to the work of negotiators, led by Vice President
Joe Biden, who are trying to find trillions of dollars in
savings as part of a deal that would allow Congress to sign off
on new government borrowing before the U.S. runs out of money
to pay its bills.
As the group faces competing demands for stimulus and
austerity, some have suggested that it may not be able to get a
deal done in time to head off a debt default in early August.
Senate Democrats want the deal to include a payroll tax
cut, more money for highway construction and clean-energy
subsidies to bring down the 9.1 percent unemployment rate.
"Get the recovery right before you get in this
deficit-cutting mode," Assistant Senate Democratic Leader Dick
Durbin told reporters. "Get people back to work."
Republicans said that idea is not likely to go far in the
Biden-led talks, which have largely focused on spending cuts.
"They're not talking about spending money in there," said
Ryan Patmintra, spokesman for Senator Jon Kyl, one of two
Republicans participating in the talks. Many Republicans view
President Barack Obama's 2009 stimulus package as an $830
billion failure and say spending cuts would help the recovery.
Federal Reserve Chairman Ben Bernanke questioned that
approach. "I don't think that sharp, immediate cuts in the
deficit would create more jobs," he told reporters. "In the
short run ... fiscal tightening is at best neutral and probably
somewhat negative for job creation," he added.
As the United States struggles to emerge from the deepest
recession since the 1930s, rising health costs and an aging
population pose a longer term threat.
The CBO report found that public debt will exceed the size
of the economy by 2021 unless lawmakers raise taxes or scale
President Barack Obama is due to meet with Biden and top
Democrats from the House of Representatives on Thursday morning
to discuss the talks, the White House said.
The Biden group, which includes six Republican and
Democratic lawmakers, is racing to complete a deal by next week
but negotiators are at odds over the big-ticket items.
Republicans say they will not consider tax increases, while
Democrats have said they won't back cuts to expensive health
care benefit programs.
The group aims to reduce budget deficits by $4 trillion
over the next 10 years to give lawmakers the political cover to
raise the $14.3 trillion debt ceiling by a large enough
increment to cover borrowing needs through the 2012 elections.
Treasury Secretary Timothy Geithner has warned that the
country could default on its loans if Congress doesn't act by
Aug. 2, a scenario that could push the country back into
recession and upend financial markets.
Obama and House Speaker John Boehner, the top Republican in
Washington, want the Biden group to wrap up its work next week
to give them time to hammer out the final details. Any
stimulus efforts could enter the discussion at that point, a
congressional aide said.
The deal would then have to win approval from the
Republican-controlled House and the Democratic-controlled
Senate -- a tough task for party leaders. Many Republicans have
said they won't back a deal unless it includes immediate
spending cuts and advances a balanced-budget amendment to the
Constitution, which would be unacceptable to Democrats.
Democratic and Republican leaders in the Senate say
Congress may have to pass a short-term fix if the Biden group
fails to reach a deal soon.
Durbin said Congress could pass a "serious down payment on
the deficit" followed by more work on long-term savings.
Many in Congress do not want to focus on the issue longer
than necessary. Senator Max Baucus, a Democrat involved in the
talks, said a short-term fix was unlikely. "There will be an
agreement," he said.
Investors say a temporary fix would likely cost the United
States its coveted AAA credit rating, raising borrowing costs
and hurting the fragile economic recovery.
Moody's main analyst for the United States Steven Hess told
Reuters in an interview that a modest rise in the debt ceiling
could be a sign that Washington's final budget agreement will
not be enough to meaningfully cut the U.S. deficit.
(Additional reporting by Donna Smith, Deborah Charles
Alister Bull and Steve Holland; Editing by Cynthia Osterman)