Obama, Republicans clash over U.S. debt limit increase

WASHINGTON (Reuters) - If Republican and Democratic leaders want to avoid a reprise of last year's nasty showdown over raising the federal debt limit, they are not off to a good start.

After meeting with President Barack Obama and senior Democratic lawmakers over lunch at the White House on Wednesday, top Republicans came away thinking the Democratic president does not want new spending cuts to accompany any legislation to increase the debt limit.

Democrats disputed the accuracy of that impression, but such a stance by Obama would put Democrats on a fiscal collision course with Republican House of Representatives Speaker John Boehner, who, according to aides, told the president that "I'm not going to allow a debt ceiling increase without doing something serious about the debt."

After the meeting, White House spokesman Jay Carney did not specify whether Obama would refuse to consider spending cuts as part of a plan to increase the debt limit.

But Carney said Obama made it clear to Boehner "that we're not going to re-create the debt ceiling debacle of last August."

The lengthy stalemate between Congress and the White House over raising the debt ceiling last summer brought the United States to the brink of a historic default, and led Standard and Poor's to downgrade the triple-A U.S. credit rating.

The episode did not push up interest rates, but economists say the uncertainty it created contributed to a slowdown in economic growth last year.

The U.S. Treasury is now expected to reach the $16.4 trillion debt limit sometime between the November 6 election and early 2013, an event that eventually would halt government borrowing, force shutdowns of many operations and threaten the government's ability to repay maturing debt.

"It is simply not acceptable to hold the American and global economy hostage to one party's political ideology," Carney said, an apparent reference to compromise-resistant Republicans in Congress who will not accept any tax increases as part of a plan to trim the government's debt

Carney added that Obama wanted a "balanced approach" to deficit reduction - a phrase Democrats have used to refer to tax increases on the wealthy alongside spending cuts.

DISAGREEMENT OVER OBAMA'S STANCE

Besides Obama and Boehner, Wednesday's meeting over Italian-style sandwiches included House Minority Leader Nancy Pelosi and Senate Majority Leader Harry Reid, both Democrats, and Senate Minority Leader Mitch McConnell, a Republican.

The meeting took place a day after Boehner issued a demand that any increase in federal borrowing authority be exceeded by spending cuts.

A Boehner aide said the speaker asked Obama at the White House on Wednesday whether he was proposing that Congress pass a debt limit increase without spending cuts.

"The president said, 'Yes,'" the aide said.

That assertion about Obama's position was later disputed by Pelosi and other Democrats.

The inability of Republicans and Democrats to agree even on what Obama said during the meeting symbolized the distance between them on the debt issue.

Some Democrats suspect that Republicans might be willing to feed a debt crisis that increases instability in the economy - and potentially damages Obama's chances of defeating Republican Mitt Romney in November.

Republicans reject that scenario, but party leaders in Congress, and Romney, who is on the campaign trail, now seem to be in harmony with their anti-Obama message on the debt.

On Wednesday in St. Petersburg, Florida, Romney blasted Obama's spending record while standing in front of a digital debt clock that showed $15.685 trillion and counting.

"I find it incomprehensible that a president could come to office and call his predecessor's record irresponsible and unpatriotic, and then do almost nothing to fix it and instead every year add more and more spending," Romney said.

After mainly attacking Obama and his Democrats on the sluggish economy and high unemployment, Romney and other Republicans are opening a new front on an issue where they feel they have the upper hand - runaway Washington spending. Anxiety over U.S. debt swept dozens of Tea Party fiscal conservatives into Congress in 2010.

"They believe that talking about fiscal problems - the debt and the deficits - are good issues for them," said Ethan Siegal, who tracks Washington politics for institutional investors. "It puts Obama on the defensive, and it gins up the fiscal activist base" within the Republican Party.

Republicans "need to have their base excited about the election," said Siegal, who added that if the economy continued its slow but steady improvement, its negative impact for Obama could wane in coming months.

SEEKING MEANINGFUL DEBATE

Michael Pond, a fixed-income analyst with Barclays Capital in New York, estimated that Congress would not have to act to raise the debt limit until at least February, as the Treasury Department could stave off the day of reckoning by some two months with special cash management measures employed last year.

More moderate Republicans in Congress welcome an early debate over the borrowing cap, but want a constructive dialogue.

"I think it's helpful as long as we have a strategy," said Republican Representative Stephen LaTourette, who has championed bipartisan solutions to debt reduction.

"To just bring it up and dig our heels in the sand and say we're going to have a repeat of last August, I don't think anybody came out of that very well," the congressman said.

Democrats are ready to pounce on the specific cuts that Republicans are proposing to reach their deficit-reduction goals - mainly to the popular Medicare healthcare system for the elderly, Medicaid healthcare for the poor, food stamps and other social safety net programs.

Boehner has already ruled out tax hikes as part of any debt-reduction deal, although he said comprehensive tax reform efforts, possibly next year, could cause some Americans' tax bills to rise as certain deductions and credits are eliminated.

An aide said Boehner had never included military cuts in his formula for a debt hike/spending reduction package.

Analysts say that leaves few places to turn for cuts - mainly the "discretionary" spending that already has been targeted, which keeps federal agencies running and funds programs ranging from education, medical research and transportation to the NASA space agency.

(Additional reporting by Richard Cowan; Editing by David Lindsey and Peter Cooney)

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