WASHINGTON - With global markets on edge, congressional Democrats and Republicans struggled through another day of difficult talks but failed to agree on cutting U.S. spending and raising the debt limit -- a necessary measure to prevent an unprecedented Aug. 2 default.
Political leaders had hoped to strike a deal Sunday to reassure investors around the world that the nasty partisan fight in Washington was nearing an end, lifting fears that the United States would be unable to cover its debts when the current borrowing limit expires a week from Tuesday.
The stakes are high. Major global credit ratings agencies have threatened to downgrade the U.S. government's triple-A credit rating unless there are assurances that the United States will not go into default for the first time in its history. A default could mean that the U.S. government could not pay all its bills starting next month, including interest and principal on Treasury bonds, Social Security checks to retirees, and payments to government contractors.
Lowering the U.S. credit standing likely would raise the cost of U.S. government borrowing. Americans seeking home mortgage or car loans would see interest rates climb, as would people with outstanding credit card balances.
President Barack Obama says that effectively amounts to a tax increase on Americans. Many economists think default could push the U.S. economy back into recession or worse, while causing chaos in the global economy.
Both Republicans and Democrats in Congress and Obama have sought to position themselves to avoid possible blame.
The biggest obstacle to a long-term debt limit extension is coming from the Republican-controlled House, which includes dozens of new Republican members elected last November with strong support from the small-government, low-tax tea party movement. Nearly all House Republicans have signed a public pledge not to raise taxes for any reason and could face primary election challenges in the run-up to the 2012 vote. They fear the wrath of voters in conservative districts for failing to live up to the promise on taxes. Members of the House must face the voters every two years.
Obama also will run for re-election in 2012 and does not want to see his campaign for a second White House term bogged down in another nasty political fight over increasing the country's borrowing limit.
Obama has insisted on an increase in tax revenues, mainly through closing loopholes and letting cuts for wealthy Americans expire, to cover some proposed spending cuts in the U.S. social safety net, programs like the Social Security pension plan and Medicare health insurance coverage for people over age 65. Republicans steadfastly refuse to accept higher taxes.
Under the leadership of an embattled Speaker Rep. John Boehner, Republicans laboured over a plan that would boost the debt limit immediately by roughly $1 trillion -- about enough to last through this year -- while locking in slightly more in spending cuts. Another package combining trillions more in savings and another extension of the debt limit would be considered later.
"It won't be 'Cut, Cap and Balance' as we passed it," he said, referring to a House measure -- killed in the Democratic-controlled Senate on Friday -- that would have required spending cuts of an estimated $6 trillion as well as congressional approval of a constitutional balanced budget amendment to send to the states for ratification.
In a conference call with members of his caucus, Boehner was quoted by one participant as saying the new approach is "going to require some of you to make some sacrifices."
Late Sunday afternoon, Obama met Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, the top Democrat in the lower chamber of Congress, for a progress report.
Afterward, a White House official said Obama and the Democratic leaders "reiterated our opposition to a short-term debt limit increase."
Markets around the world were watching nervously.
