Barack Obama, US president, called top lawmakers to the White House for a high-stakes summit on Tuesday to unlock stalled talks over the US budget, and avoid a government shutdown by the end of the week.

As the fiscal battle in Washington reached a crucial point, with tension rising, the Treasury department announced that, by May 16, the US will reach its congressionally mandated debt limit.

Though the government could take emergency cash-management actions to delay the deadline for another eight weeks, the US could default on its debt as early as July 8 if no measure is taken by Congress to increase its borrowing authority.

In a letter to congressional leaders on Monday, Tim Geithner, Treasury secretary, warned that a default could lead to a financial crisis potentially more severe than the one in 2008. “The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations,” Mr Geithner said.

The Obama administration has long insisted that an increase in the debt limit should occur without a negotiation, since it reflects decisions on taxes and spending made by both parties over the years.

But Republican lawmakers want to tie any rise in the debt ceiling to a budgetary straitjacket – such as spending caps – as well as deeper spending cuts. While an agreement on the debt limit will have to be struck soon, the more urgent task of funding for the government in the current fiscal year, which ends in September, remained unsolved.

Republicans want $61bn in cuts over that time frame, while Democrats have agreed to $33bn.

There are also divisions over the nature of the reductions and in the absence of an agreement, non-essential federal operations will close on April 8.

Jay Carney, White House press secretary, told reporters that Mr Obama “remains confident that if we, together, roll up our sleeves and get to work very quickly we can find a compromise.”

On Tuesday, Mr Obama will host the main negotiators, John Boehner, the Republican speaker of the House of Representatives, and Harry Reid, the Democratic Senate majority leader, to discuss ways to narrow the remaining differences.

In advance of the summit, Republicans continued to seek to extract the deepest possible spending cuts in the areas that matter most to their conservative wing. Mr Boehner said Democratic proposals so far were full of “smoke and mirrors”.

Meanwhile, Republicans on the House budget committee will on Tuesday release a plan to cut $4,000bn from US deficits over the next decade, taking a political risk in a move to reform large entitlement programmes such as Medicare and Medicaid, whose cost is the biggest threat to the long-term fiscal outlook. The plan has been attacked by Democrats as destroying the safety net for the poor, to the advantage of large companies and the wealthy.

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