US president Barack Obama must bridge a wide gap separating his Democrats from Republicans when he meets with Senate leaders today over raising the US debt ceiling, but neither side seems inclined to compromise.
Talks broke down last week over Democrats' demands to include tax-revenue raising steps alongside spending cuts in order to beat a August 2nd deadline to lift the $14.3 trillion borrowing limit.
Failure to act risks a devastating US debt default that could push the country back into recession. But Mr Obama must also ease public concern over his handling of the deficit, which is likely to be a key topic as he seeks re-election next year.
Republican Senate leader Mitch McConnell, who meets Mr Obama later today, stuck firmly to his party's line that revenue-raising measures were off the table. "The whole business of raising taxes, regardless of how you go about it, is something that this Congress is not likely to do," Mr McConnell told ABC's This Week yesterday.
The debt ceiling needs to be raised by around $2.4 trillion to ensure that the government has enough money to keep functioning through the November 2012 election.
Republicans say they want spending cuts to equal any increase in the limit, but the administration is pushing for a package that also includes revenues. Mr Obama favours $3 dollars in spending cuts for every extra dollar in revenue.
Mr Obama will meet Senate Democratic leader Harry Reid today to explore what Democrats could live with.
But the president spelled out in his weekly address on Saturday that the US could not "cut our way to prosperity", and this message was repeated by senior Democratic lawmakers, who adamantly deny that raising revenue equals increasing taxes.
"We want to close those loopholes up. We do not want to raise anybody's tax rates. That's never been on the table," said Democratic Representative Jim Clyburn.
Democrats are aiming at tax subsidies for oil and gas companies, so-called carried interest tax break for hedge fund managers, and loopholes that favour private corporate jets. But the president has also backed limiting tax deductions for wealthier Americans.
The White House says this targets millionaires and billionaires. But Republicans warn it would also hit hundreds of thousands of small business owners, and say the problem is too much government spending, not insufficient taxes.
The US federal deficit stands at $1.4 trillion, among the highest levels relative to the economy since the second World War.
The administration wants to frame the debate as Republicans protecting tax breaks for the rich at the expense of older Americans, while cuts in spending must also include the defence department budget that Republicans traditionally protect.
"Any package of any significance that passes is going to have to have significant spending reductions, including reductions in Pentagon spending. You are going to have some of these tax loopholes for the wealthy and special interests closed," said a senior administration official.
Democrats lost control of the US House of Representatives to Republicans in congressional elections last year - in part because of voter anger over the deficit - but they still control the US Senate.
"To get anything through the House you are probably going to need some Democratic votes, and to get it through the Senate you are going to need a lot of Democratic votes. So you need a package that can attract support from both parties in both chambers," the official said.
Reuters
