Leaders see signs of hope in budget talks

By Andy Sullivan and John Whitesides

WASHINGTON (Reuters) – Congressional leaders saw signs of progress on Wednesday for a budget deal that would cut billions of dollars in spending in time to prevent a government shutdown after Friday.

With time running short, Republican and Democratic aides said negotiators were making progress on a compromise that would avert a federal government shutdown that could idle more than 800,000 workers.

“I feel better about it today than I did yesterday at the same time,” Dick Durbin, the No. 2 Senate Democrat, told reporters.

House of Representatives Speaker John Boehner, a Republican, told President Barack Obama in a three-minute morning phone call he remained hopeful of a deal, a Boehner aide said.

A government shutdown, the first in 15 years, would ripple through an economy still recovering from the worst recession since the 1930s. Obama urged both parties to compromise and said failure to reach agreement would hurt the economy just as it was gaining momentum.

“Companies don’t like uncertainty, and if they start seeing that suddenly we may have a shutdown of our government, that could halt momentum, right when we need to build it up,” he said at a town-hall style event in Pennsylvania.

The White House painted a bleak picture of the potential impact of a government shutdown, saying it could hurt recovery in the housing market and spark reactions ranging from the closure of national parks to the suspension of the weekend cherry blossom parade in the capital.

A senior administration official told reporters the processing of some tax refunds and audits, as well as small business loans would be halted, and operations of the Federal Housing Administration would be curbed.

“Having the FHA not be able to guarantee loans during this period will have a significant impact if we shut down on the housing market, which is very fragile,” the official said.

Both parties blamed each other for the political showdown, which will set the stage for more budget battles ahead and promises to echo through the 2012 election campaign.

EVOLVING TALKS

Senate Democratic leader Harry Reid said the budget talks were “constantly evolving” and accused Republicans of changing the terms of the debate ahead of the midnight Friday deadline.

“Every time we agree to meet in the middle they move where the middle is,” Reid said as the Senate opened on Wednesday. “We stand here with fewer than 72 hours on the clock … It’s time to get the job done.”

Boehner and Reid do not have a meeting scheduled, but their staffs are swapping proposals. Negotiators had tentatively agreed on a figure of $33 billion earlier this week, but Boehner is now pushing for a target of $40 billion.

A Republican aide said staff negotiators are discussing cuts beyond the $33 billion. The aide said they also have made progress toward a compromise on the Republican push for policy “riders” such as reducing abortion funding and halting the Environmental Protection Agency’s greenhouse gas rules.

White House negotiators are still willing to discuss a final figure on spending cuts but say if Republicans insist on those policy riders a government shutdown is much more likely, Democratic sources familiar with the budget talks said.

A Republican insistence on the inclusion of such hot button budget riders poses the greatest threat of a government shutdown, the Democratic sources said.

The budget showdown is the biggest political test for both parties since Republicans swept to power in the House and made big Senate gains in last year’s elections on promises to slash government spending and reduce the federal government.

Boehner is under pressure to push for deeper cuts from fiscal conservatives aligned with the Tea Party movement who oppose any compromise. Democrats said the Tea Party was the driving force in the showdown.

“He can either do what the Tea Party wants or what the country needs,” Reid said of Boehner. “Republicans have demanded a budget that can pass with only Republican votes.”

As the fight over spending for the rest of this year raged on, Republicans in the House were moving forward with their 2012 budget proposal, which was unveiled on Tuesday.

The House Budget Committee was expected to work well into the night considering amendments to Chairman Paul Ryan’s plan that would bring down federal deficits over the long run.

It would do that through significant domestic spending cuts and major overhauls to Medicare and Medicaid, the federally-run healthcare plans for the elderly and poor.

Ryan’s plan, which already has been criticized by the White House and Senate Budget Committee Chairman Kent Conrad, might not get much further than House passage this year.

(Additional reporting by Matt Spetalnick, Caren Bohan, Donna Smith, Thomas Ferraro, Patricia Zengerle, Tim Reid and David Morgan; Writing by John Whitesides; editing by Vicki Allen and Deborah Charles)

Leaders see signs of hope in budget talks