Republicans reject Obama pleas on deficit

Barack Obama repeatedly pressed Republican leaders to reconsider their decision to abandon a $4000bn fiscal reform package at a high-stakes White House summit on Sunday night.

According to a Democratic official, the US president’s pleas were rejected by Republican leaders, who over the weekend said negotiations would have to focus on a less ambitious package worth about $2,000bn that would allow for an increase in America’s borrowing limit, but delay a solution to the country’s long-term fiscal woes until after the 2012 presidential election.

The talks are set to resume on Monday afternoon and continue every day this week amid growing pressure to reach a deal before the August 2 deadline set by the US Treasury. Officials from the Treasury, the International Monetary Fund and executives on Wall Street have warned that failure to pass an increase in the debt ceiling by that date could lead to a default and plunge the US economy back into recession.

Moody’s Investors Service has said it could place America’s triple-A credit rating on review for downgrade by mid-July in the absence of a deal to increase the debt limit.

According to a Democratic official, the talks over a grand bargain had been progressing swiftly and the two sides had been very close to a deal, so there was surprise and disappointment in their ranks when on Saturday night John Boehner, the Republican Speaker of the House, withdrew his support for a large-scale compromise.

Under this proposal, Democrats had essentially agreed to significant structural reforms affecting beneficiaries of Medicare, the popular government sponsored insurance programme for the elderly. In exchange, Democrats were seeking a framework allowing an extension of Bush era middle-class tax cuts while ending those for the wealthiest Americans. At the same time, a broader tax reform process would be put in place to lower overall rates while ending some deductions and exemptions for businesses and individuals, drawing from recommendations made by last year’s bi-partisan fiscal commission.

Although Mr Boehner was initially willing to entertain such a compromise, other Republicans, including Eric Cantor, the majority leader, had indicated late last week that such a proposal would not have enough votes to pass the Republican-controlled House. Parties did not enter detailed discussions on the smaller deal, partly because Mr Obama continued to argue in favour of a grand compromise that he said would be just as difficult to pass as the less ambitious plan that Republicans are seeking.

According to the Democratic official, Republicans did not offer many clues as to why they would not consider a big deal, but there was suspicion that they may have been influenced by an editorial in the Wall Street Journal that suggested Republicans were getting a bad deal. “He [Mr Obama] is using the August 2 deadline to bull-rush Mr Boehner into a bad deal”, said the newspaper. It added: “Mr Boehner shouldn’t bet his majority on Mr Obama’s promises.”

There was also speculation that staunch opposition to any compromise over a debt ceiling deal from Republican candidates for president, especially Michele Bachmann, the Minnesota congresswoman, may have played a role.

After the meeting, an aide to Mr Boehner said that the speaker believed that a package based on earlier negotiations aiming at a smaller package led by vice president Joe Biden was “the most viable option at this time for moving forward.”

Before the meeting on Sunday, White House and Republican officials had expressed confidence that a deal to raise the debt ceiling would be reached by the August deadline.

“The leaders of America will not allow the first default in the history of the country to occur,” said Bill Daley, White House chief of staff, on ABC’s This Week.

Tim Geithner, the Treasury secretary, told NBC’s Meet the Press: “The United States is not going to default. We are a country that pays its bills. We’re going to meet our obligations.”

However he also warned, “The longer we go into July, the more risk there will be in financial markets, more concern the risk that America cannot get its act together to figure out how to solve this problem.”

Mitch McConnell, the top Senate Republican, told Fox News: “Nobody is talking about not raising the debt ceiling.”