President Barack Obama summoned leaders of both parties to the White House to hammer out a deal to stave off a US debt default with the potential to trigger a major, worldwide financial crisis.
Mr Obama called yesterday for a deal to raise the nation’s borrowing limit that not only cuts spending, as opposition Republicans are demanding, but also raises revenues in the form of tax increases – something that they violently oppose.
“We need to come together over the next two weeks to reach a deal that reduces the deficit and upholds the full faith and credit of the United States government and the credit of the American people,” Mr Obama said at the White House.
“We’ve made progress, and I believe that greater progress is within sight, but I don’t what to fool anybody – we still have to work through real differences,” the president said.
Raising the US debt ceiling, usually little more than a formality in most years, has turned into a game of political brinksmanship ahead of the 2012 presidential elections with Republicans demanding huge spending cuts as the price for their support.
Although not required to raise the debt limit, politicians and the administration are seeking deficit cuts in the range of 2.4 trillion dollars (£1.5tn) over the coming decade to balance a similar increase in the debt limit - enough to keep the government afloat past the November 2012 election. Currently, the debt limit is 14.3 trillion dollars (£8.9tn).
It remained unclear where compromise could be found. Democrats are refusing to sign off on cuts of such magnitude without at least some tax increases. Republicans say they will not sign off on any tax hikes at all, including those Mr Obama wants targeting the wealthiest Americans or closing loopholes to corporations.
“We’re not dealing just with talking points about corporate jets or other ’loopholes’,” said House of Representatives speaker John Boehner, a Republican.
“The legislation the president has asked for – which would increase taxes on small businesses and destroy more American jobs – cannot pass the House, as I have stated repeatedly.”
Mr Boehner said he would be happy to join discussions at the White House but predicted they “will be fruitless until the president recognises economic and legislative reality”.
Mr Obama insisted that any deal must include new tax revenue.
The stand-off finds both parties playing to their bases, with the Republicans trying to demonstrate their fiscal conservatism and anti-tax bona fides, while Mr Obama’s Democrats want the wealthiest Americans and giant corporations to shoulder some of the burden.
Mr Obama spoke as the August 2 deadline for raising the US borrowing limit came closer.
The Obama administration warns that if the debt ceiling is not raised by that date, the US would face its first default, potentially throwing world financial markets into turmoil.
Many congressional Republicans indicate they are unconvinced that such scenarios would occur, and some administration officials worry that it could take a financial calamity before Congress acts.
The ratings agency Standard & Poor’s has warned it would give the US government its lowest credit rating if politicians fail to raise the borrowing limit and the United States defaults on its debt, but so far markets have remained unfazed, apparently doubting lawmakers would willingly throw the economy into a tailspin.
Still, experts say lawmakers must waste no time in making a deal if they are to have any chance of getting it finalised and passed through both chambers of Congress in time.
Republicans are insisting on at least two trillion dollars in spending cuts before they will agree to increase the debt ceiling. The White House has identified at least $1.3 trillion in spending cuts over 10 years and is proposing up to $400bn in new tax revenue.