Obama: Still differences on debt, new talks set for Sunday

WASHINGTON -- Under an urgent deadline, President Barack Obama and congressional negotiators set their sights on the nation's tax system and benefit programs Thursday in hopes of striking a massive budget deal to raise the nation's debt ceiling. Obama said the two sides were still far apart and called everyone back to the White House on Sunday.

The president met with the eight top Republican and Democratic congressional leaders for an hour and a half Thursday, hoping to bridge ideas held by the two sides -- each considered untenable by the other. On Capitol Hill, Democrats appeared especially rattled that the discussions included proposals to cut spending for Social Security as well as Medicare and Medicaid.

High-level talks, after dragging on for weeks, have entered a suspenseful endgame. The shape of an agreement is still in doubt as the nation moves ever closer to an Aug. 2 deadline to raise the government's debt ceiling.

Obama pushed for an ambitious deficit reduction plan of roughly $4 trillion, the biggest of three options he laid on the table. It would require sizable tax revenue, which many Republicans oppose, and spending reductions for entitlement programs, opposed by many Democrats. But the idea of a potentially historic deal was well received by the meeting participants, officials said later, even though the details remained in dispute.

After the 90-minute session, Obama said Democrats and Republicans should be prepared to show their bottom-line demands when they return to the bargaining table for the rare Sunday session.

The negotiating stakes are high. Without a deal on deficit reduction, Republican leaders say they don't have enough GOP votes to increase the nation's borrowing authority, raising the danger of the first ever U.S. default on its debts when the current $14.3 trillion debt ceiling is tapped out.

"Everybody acknowledged that we have to get this done before the hard deadline of Aug. 2 to make sure that America does not default for the first time on its obligations," Obama said. "And everybody acknowledged that there's going to be pain involved politically on all sides."

That leaves little time to agree on 10-year deficit reductions of $2 trillion to $4 trillion.

The major clash centers on how to reduce spending on major entitlement programs such as Medicare, Medicaid and Social Security, all prized by Democrats, and on tax changes that would close loopholes and end certain corporate breaks. Republicans insist that any tax changes be used to lower rates on corporations and individuals; Obama wants them also to generate more tax revenue.

Increasing the debt ceiling through the end of 2012 -- a date favored by the White House -- would require authorizing about $2.4 trillion in additional borrowing. House Speaker John Boehner has insisted on a 10-year deficit reduction figure that, at a minimum, matches the amount of additional borrowing. One aide to a lawmaker in Thursday's meeting said Obama made it clear he wouldn't sign a budget and debt agreement that didn't extend the debt ceiling until after the November 2012 presidential election.

In the meeting, Obama told the leaders that they faced three options -- a small deficit reduction plan, a medium plan that would reduce deficits by $2 trillion over 10 years or a big agreement that would shoot for up to $4 trillion in deficit reductions over the next decade. Obama indicated he preferred the largest number.

Boehner and Senate Minority Leader Mitch McConnell of Kentucky backed Obama's bigger, more ambitious goal, said Democratic officials familiar with the talks. Their lieutenants, Senate GOP Whip Jon Kyl of Arizona and House Majority Leader Eric Cantor of Virginia, indicated they believed the medium-size option was more realistic. Both Cantor and Kyl had participated in talks led by Vice President Joe Biden that had already identified about $2 trillion in deficit reduction.

The negotiations are politically difficult for both parties.

Raising the debt ceiling is unpopular with voters, especially those who vote Republican, increasing concern among GOP lawmakers that they could be challenged by fellow Republicans in primaries across the country.

The big entitlement programs such as Social Security, Medicare and Medicaid have long been protected by Democrats in Congress.

Signaling a potential obstacle, House Democratic leader Nancy Pelosi said she and fellow Democratic lawmakers will oppose including cuts in Social Security or Medicare benefits in any package aimed at reducing huge federal deficits.

"We are not going to balance the budget on the backs of America's seniors," Pelosi said.

Pelosi said she did not raise her concerns at Thursday's meeting but will have a chance to bring them on Friday when she is to meet on her own with Obama at the White House. A Democratic official said the meeting had been scheduled ahead of time and was not designed to be a follow- up to Thursday's session.

The White House has proposed reductions in Social Security, Medicare and Medicaid spending. One proposal under discussion would find savings by changing the formula for determining annual cost-of-living increases for Social Security beneficiaries. That would save about $100 billion over 10 years. Officials familiar with Thursday's discussions said that specific proposal did not come up in the meeting with congressional leaders.

Nevertheless, the White House was forced to downplay it after news organizations reported that the government retirement program was part of the talks.

"There is no news here -- the president has always said that while Social Security is not a major driver of the deficit, we do need to strengthen the program," White House spokesman Jay Carney said. Any change, he said, would have to ensure that it "doesn't slash benefits."

Underscoring the political stakes, Pew Research Center reported Thursday that in a recent poll it found that six of 10 of those surveyed believe it is more important to maintain Social Security and Medicare benefits than to reduce the budget deficit.

On health care, negotiators have been closing in on cuts of about $200 billion over 10 years, about equally divided between Medicare and Medicaid. In percent terms, that's equivalent to a single-digit reduction in what the government will spend during that period on the two giant health care programs serving some 100 million Americans. But for individual industries such as hospitals, drug manufacturers and nursing homes, it could mean major hits.

Republicans have showed some new flexibility on the closing of tax loopholes and ending of corporate tax breaks that Obama has demanded. But they say any revenue generated by those steps would have to be used to lower tax rates and simplify the tax system. Such a step would require a major overhaul of the tax code and could not be accomplished in the few weeks left before the Aug. 2 debt ceiling deadline.

One Republican official said that under one option Republicans would include specific language in legislation that would set a specific time to undertake a tax overhaul. That official and others spoke only on condition of anonymity to discuss the private negotiations.

Forty-one senators and 235 House members have signed an Americans for Tax Reform pledge to oppose raising taxes that are not offset by spending cuts. Grover N. Norquist, president of the group, said Thursday in a telephone interview that House Republican leaders have assured him that whatever revenue-increases are being discussed would be offset "dollar for dollar."

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Associated Press writers Ben Feller, Andrew Taylor, Alan Fram, Ricardo Alonso-Zaldivar and Laurie Kellman contributed to this report.