Analysis: Debt deal not that far out of reach

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)