WASHINGTON (Reuters) – Senate Democrats have discussed with President Barack Obama a scaled-back budget deal that would avert a looming default but force Congress to tackle the politically toxic issue again before the 2012 elections, a Senate Democratic aide told Reuters on Thursday.
Such a deal would cover the country's borrowing needs for seven months, the aide said, adding it is one of a handful of options discussed in meetings. A seven-month debt limit increase theoretically would include budget savings of roughly $1 trillion to attract the Republican support needed to pass it through Congress.
The White House said it was not considering the plan.
"The president has consistently said it's in the country's best economic interests for Congress to reach common ground on a significant long-term deficit reduction package," White House deputy communications director Jen Psaki said.
"He has been clear in conversations with leaders in both parties about that."
Senate Democratic leader Harry Reid told reporters, "We're working on a number of different proposals," adding, "We discussed four of them with the president yesterday."
Congress must raise the $14.3 trillion debt ceiling by August 2 to avoid a default that could push the United States back into recession and send financial markets plummeting.
For months, there has been speculation that if Obama and congressional Republicans can't agree on deep enough savings, they might have to move toward a shorter-term debt limit hike -- as politically distasteful as that is -- and then hold another round of budget talks in coming months.
Last week, negotiations led by Vice President Joe Biden collapsed over tax hikes. Democrats say spending cuts should not be the only component of a deficit-reduction package that would make it easier for lawmakers to sign off on further borrowing.
Meanwhile, Treasury Secretary Timothy Geithner, sought to quell speculation he could be headed for the exit once a budget deal is struck.
"People are a little worried or interested because I have a family, my son's going back to New York to finish high school and I'm going to be commuting for awhile -- but I'm going to be doing this for the foreseeable future," he said in Chicago at an event with former President Bill Clinton.
Democrats have stepped up their attacks in recent days, challenging Republicans to defend tax breaks for corporate jets, race horses and yachts that benefit the wealthy that they want to close as part of the deal.
Democratic Senator Jeff Merkley called the racehorse tax break the "bluegrass boondoggle" in a slap at Senate Republican leader Mitch McConnell, whose home state of Kentucky is famous for horse racing.
The White House believes a deal needs to be in place by July 22 to give Congress enough time to pass it, according to Democratic officials familiar with the talks.
Bank regulator Sheila Bair said markets could be spooked well before August 2 if they see no signs of progress.
"Why even go there? Why even flirt with it?" Bair, the outgoing chairman of the Federal Deposit Insurance Corp, told the Senate Banking Committee.
Reid canceled a planned break during the week of the July 4 Independence Day holiday to keep the Senate in session at Obama's request.
With the country borrowing roughly $150 billion per month, a seven-month deal would require a debt-limit hike of roughly $1 trillion. Negotiators had tentatively agreed on at least that amount of spending cuts before talks collapsed.
'A STAY OF EXECUTION'
A short-term deal could weaken the dollar and push up Treasury yields if investors and debt-rating agencies conclude that Washington does not have the stomach to confront its fiscal ills.
"A temporary increase is just a stay of execution. They will have to make these difficult decisions at some point," said Ward McCarthy, a top economist at Jefferies & Co.
Other ideas that Democrats are considering include a bigger deal that would extend U.S. borrowing authority through 2012, which would probably require more than $2 trillion in budget savings over 10 years. Another option would include longer-term spending cuts totaling $4 trillion.
Democratic Senator Charles Schumer said Republicans are blocking job-creation ideas in a budget deal in order to pin the sluggish economy on Obama in the November 2012 elections.
"Republicans aren't just opposing the president any more," Schumer said at the Economic Policy Institute, a liberal think tank. "They are opposing the economic recovery itself."
Republicans said the tax hikes Democrats want would worsen the 9.1 percent jobless rate.
"When the president talks about raising taxes, he's talking about killing jobs," said Republican Senator Jon Kyl.
Budget deficits in recent years have hovered near their highest levels relative to the size of the economy since World War Two. The deficit for the current fiscal year, which ends September 30, is projected to hit $1.4 trillion.
(Additional reporting by Alister Bull, Dave Clarke, Thomas Ferraro, Jeff Mason, Donna Smith and Deborah Charles in Washington and Ellen Freilich in New York; Editing by Eric Walsh)
