WASHINGTON -- The White House is eyeing a return to the "grand bargain" it tried to reach late last year with House Speaker John Boehner as perhaps the best hope of defusing a fresh threat to the U.S. economy in just two months, according to people familiar with the discussions.
As planning begins for the next phase of Washington's fiscal wars, attention is turning to a strategy for avoiding deep automatic cuts to domestic and defense spending and averting a government default -- which could all hit at the same moment.
Democratic and Republican officials say they could build on the "grand bargain" talks, which looked at raising new revenue by a tax code overhaul and reducing spending, including on Medicare, Social Security and other entitlement programs.
But as in the earlier negotiations, there remain sticking points. How much new tax revenue would Republicans accept, especially now that tax rates on the wealthy are already climbing under the "fiscal cliff" pact? And how far will President Barack Obama go in meeting the GOP demand for deep spending cuts?
Mr. Obama and Mr. Boehner, R-Ohio, came tantalizingly close last month to a broad deal aimed at stabilizing the federal debt. But the speaker abandoned the talks, saying the White House offer was too heavy on taxes and too light on spending cuts. Instead, Democrats and Republicans reached a far more modest agreement to avoid the fiscal cliff, largely through the direct negotiations of Senate Minority Leader Mitch McConnell, R-Ky., and Vice President Joe Biden.
Republicans say they have a stronger hand in the new negotiations because of the federal government's pressing need to increase its $16.4 trillion borrowing limit. The government hit the debt ceiling this week, and the Treasury Department warns that it will be unable to pay its bills in about two months unless it can borrow more. Congressional Republicans say they will not vote to raise the debt ceiling unless there is a deal to make steep spending cuts.
White House officials insist that the government must meet its obligations, and thus raising the debt ceiling is non-negotiable. But some Democrats say the bargaining advantage has shifted toward the GOP.
White House officials still believe that the framework previously discussed by Mr. Obama and Mr. Boehner offers ample scope for a deal to avoid the automatic spending cuts, known as a sequester, according to people familiar with the discussions. Such an agreement, they say, could yield legislation that would also raise the debt ceiling.
Privately, some Republicans are not opposed to the approach. The GOP is "generally open to the framework, but the devil is in the details," said one Republican leadership aide. The aide noted that House Ways and Means Committee chairman Dave Camp, R-Mich., already intends to seek tax-code reform this year.
Still, the GOP plans to press its case that the time to discuss tax increases is over, and that the focus now must be on spending cuts. At a closed-door meeting Friday, Mr. Boehner told House Republicans that any debt-limit increase must be accompanied by spending cuts and reforms of a greater amount, according to a person in the room.
During the Obama-Boehner negotiations, the president offered about $900 billion in spending cuts, including $600 billion to entitlement programs such as Medicare. Mr. Obama has also been willing to adopt a less-generous measure of inflation in calculating Social Security payments.
At the same time, Mr. Obama insists that tax revenues must be further increased in exchange for spending cuts. The bill approved by Congress this week raised slightly more than $600 billion of revenue over 10 years by raising tax rates. Mr. Obama now wants to raise about $600 billion more by limiting tax breaks.
The discussion of a new "grand bargain" would center on replacing the sequester, set to slice domestic and military spending by $1.2 trillion over a decade. While a budget accord could also include an increase in the debt ceiling, Mr. Obama had said he will not explicitly trade anything for that increase.
"He's willing to have negotiations on further long-term deficit reduction, and he's willing to do that in a balanced way," said Rep. Chris Van Hollen, D-Md., a White House ally. "The context of the discussions will be in terms of replacing the sequester."
Republicans, however, say they will put the debt limit at the center of negotiations and are willing to shut down the federal government in March, when a resolution funding it expires.