WASHINGTON (Reuters) – Sputtering job growth and talk of new tax cuts are throwing more hurdles in the way of a deal to reduce the deficit as Democratic and Republican negotiators step up budget negotiations on Tuesday.
As Vice President Joe Biden and top lawmakers try to work around a stark divide over taxes and healthcare, their quest to find trillions of dollars in budget savings may be complicated by the need to boost the economy in the short term.
The group, which also includes top lawmakers from both parties, will meet at 2 p.m. EDT in the Capitol, the first of three meetings planned this week to take a close look at annual spending levels, budget process reforms and healthcare benefits.
The group is stepping up efforts to find a deal that would give Congress the political cover to raise the $14.3 trillion debt ceiling by an August 2 deadline.
The Treasury Department has warned it will need to start halting some payments if Congress does not act by then.
"We could actually have a reprise of a financial crisis, if we play this too close to the line. So we're going be working hard over the next month," President Barack Obama said on Tuesday in an interview with NBC's "Today" show.
Many on Wall Street fear that even the briefest default by the United States could sink the dollar and spike interest rates sharply higher, tipping a fragile economic recovery back into recession. Many Republicans say Treasury should make debt service its top priority, but that would require painful cuts elsewhere.
Participants have scaled back their rhetoric recently. Eric Cantor, the No. 2 Republican in the House, heaped praise on Biden on Monday and said the group was "beginning to see the essence of convergence."
Obama and House of Representatives Speaker John Boehner, the top Republican in Congress, want the group to complete its work by July 4, and markets have made it clear they want to see substantial progress by mid-July.
Deficits are hovering at their highest levels relative to the economy since World War Two. For this year, the U.S. deficit is expected to reach $1.4 trillion.
ECONOMY STILL STRUGGLING
As negotiators weigh painful cuts in annual spending and benefit programs, their task could be complicated by the need to weave in measures to stimulate the economy.
Recent data indicate the country is still struggling to emerge from the deepest downturn since the Great Depression, and the unemployment rate ticked up last month to 9.1 percent.
Washington has few tools left to spur faster job growth as the Federal Reserve's sweeping bond-buying program winds down and Congress has no appetite for additional fiscal stimulus.
Still, both parties are eager to show voters they are taking steps to spur job creation.
The White House is weighing a payroll tax cut for businesses and Republicans are touting a job-creation agenda of that consists of tax cuts and scaled-back regulation.
Top Republicans declined to comment about the payroll tax cut. "There are a lot of issues on the table," Boehner said.
In the past six meetings, progress has been slow as the two sides have held firm to their entrenched positions. Democrats oppose proposals to scale back healthcare benefits while Republicans refuse to consider any tax hikes.
The Senate will vote later on Tuesday on a proposal to cut ethanol subsidies, which would save $6 billion annually. Farm subsidies are regarded as "low hanging fruit" by members of the Biden group but lawmakers from rural states may not agree.
Republicans have said that any debt-limit increase must include spending cuts of at least equal size, which would point to a package of at least $2 trillion to cover the country's borrowing needs through the November 2012 elections.
Those cuts could be spread out over 10 years, which would minimize their impact in the short term.
(Additional reporting by Richard Cowan, Matt Spetalnick and Jeff Mason; Writing by Andy Sullivan; Editing by Doina Chiacu)
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