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WASHINGTON (Reuters) - You would never know it from all the hot air rising out
of Washington, but President Barack Obama and congressional Republicans could
easily reach a deal to raise the debt limit and avoid an early August default.
Before talks hit a brick wall last weekend, negotiators were tantalizingly
close to a $2 trillion-plus budget deal that would enable Congress to sign off
on further borrowing, according to Democratic and Republican sources.
Since then, things have not looked good. Obama compared Republicans to lazy
schoolchildren and Democrats accused them of deliberately sabotaging the
economy. Republicans have not shied away from salty language, either.
"Washington is addicted to spending, and the addict-in- chief is the
president," Republican Senator Jim DeMint said on the Senate floor on Thursday.
Analysts worry lawmakers may be painting themselves into a corner. "In order to
get out of this mess they're going to have to eat some of their words," said
Joe Minarik, a former budget official in the Clinton administration.
The Treasury Department has warned the country will face default if Congress
does not lift the $14.3 trillion debt ceiling by August 2. That could push the
country back into recession and upend financial markets across the globe.
Whether Republicans and Democrats can bridge their differences over the coming
weeks remains to be seen.
From a dollar standpoint, the two sides are closer to a deal than it might
appear.
In talks led by Vice President Joe Biden, negotiators had tentatively agreed to
reduce discretionary spending, which covers everything from space exploration
to pollution control, by between $900 billion and $1.3 trillion over 10 years,
according to aides from both parties.
Republicans resisted cuts to military and other security spending sought by
Democrats, but Senator Charles Schumer, a Democrat known as a hard-nosed
partisan, said on Thursday he thought a compromise was possible in this area.
The two sides had also identified cuts to a wide range of benefit programs,
such as farm subsidies, student aid and federal employee retirement plans.
Democrats say these total about $200 billion, while a Republican aide put the
total at $275 billion to $325 billion.
STRUCTURAL CHANGES TO MEDICARE?
Democrats have hammered their conservative opponents over a Republican proposal
to scale back the Medicare program for future retirees, but the budget talks
have yielded some consensus in this area as well.
Democrats say the deal could save roughly $200 billion through structural
changes to health programs like Medicare and Medicaid, the healthcare program
for the poor and handicapped, that don't scale back benefits, while Republicans
say the total could be as high as $400 billion.
Both sides have also taken a look at changing the inflation index, which could
slow the growth of benefit payments and tax exemptions. That could yield $300
billion.
The lowered spending levels would reduce the amount the government spends on
interest payments. That could yield a further $325 billion to $350 billion in
savings, according to a Republican aide.
The potential cuts total between $1.9 trillion and $2.7 billion -- roughly
enough to ensure that Congress would not have to revisit the politically toxic
issue before the November 2012 elections.
The main sticking point is tax increases. Republicans leaders have said they're
off the table, and Democrats no longer expect to get the increase in income-tax
rates for wealthy households that they had initially sought.
Instead, they aim to close a range of tax breaks that could generate $400
billion in new revenue. Republicans are not likely to agree to the largest of
these, which would generate $300 billion from wealthy taxpayers by limiting the
amount of deductions they can claim.
But other breaks for corporate jets, yachts and racehorses have a minimal
impact on the budget and provide Democrats with vivid fodder for campaign
attack ads. Throwing a few of these into the deal could avert a few headaches
for Republicans and allow Democrats to claim a moral victory.
"It's going to be a difficult lift, but I still think that calmer minds will
prevail in the end and they'll recognize that we don't have any alternative but
to move forward," said Bill Hoagland, a former Republican congressional aide
who has worked on budget issues for decades.
(Additional reporting by Alister Bull and Deborah Charles; editing by Todd
Eastham and Cynthia Osterman)