House Republican Speaker John Boehner spelled out his plan Monday to trim as much as $3 trillion from the U.S. deficit and lift the debt ceiling while Senate Democrats pursued a separate proposal, continuing an impasse with a default deadline a little more than a week away.
Mr. Boehner, of Ohio, briefed Republican lawmakers on his plan, which involves two steps. The first phase would cut discretionary spending levels by $1.2 trillion over 10 years and raise the debt ceiling by around $1 trillion, enough to support federal borrowing until February or March, congressional aides said.
The second phase would establish a committee of lawmakers to find at least a further $1.8 trillion in savings over the next decade. If Congress winds up approving these savings, the debt ceiling could be raised through the end of 2012.
The panel would be given a broad mandate, but would probably focus on large entitlement programs such as Medicare, Medicaid and Social Security as well as overhauling the tax code. The aides said the framework of the mandate wouldn't include any tax increases, although the committee of lawmakers wouldn't be prohibited from raising revenue as part of the tax-code overhaul.
The panel would have 12 members—three from each party in the House and Senate. A majority of its members would have to approve its recommendations to trigger votes in the House and Senate. It would have a Nov. 23 deadline to report back to the full Congress, which would then have to vote on the findings by Dec. 23.
Mr. Boehner is expected to file legislation by midnight and could bring it to a vote Wednesday, an aide said.
Senate Majority Leader Harry Reid (D., Nev.) unveiled his separate plan for $2.7 trillion in spending cuts over 10 years. This would include an increase in the debt limit sufficient to carry the government through the end of 2012 and no increase in tax revenue. Mr. Reid's plan would cut discretionary spending by $1.2 trillion. His plan doesn't target entitlement programs such as Medicare.
Mr. Reid's plan seeks at least $10 billion in savings from agricultural programs, $1 trillion in savings from ending the wars in Iraq and Afghanistan, and it would set up a panel to recommend future debt-reduction plans.
Voting on the Senate plan also would start Wednesday but may not be completed until Sunday, aides said.
The White House and Congress have eight days to raise the U.S. debt ceiling or risk a default. Treasury officials have warned that without an increase to the debt limit by Aug. 2, the government wouldn't be able to pay all of its financial obligations, including Social Security benefits, military pensions, contractor payments and interest on its debt.
All three major credit rating firms have threatened to lower their top triple-A rating on U.S. debt if the White House and Congress don't come to an agreement to raise the debt ceiling.
So far, the financial markets have shown concern but haven't dropped precipitously, as some had feared. The yield on a 10-year U.S. Treasury bond rose above 3% for the first time in months, while the Dow Jones Industrial Average fell, following declines in Asian and European markets. The International Monetary Fund issued a fresh warning Monday about the "universally large and negative effects" of a loss of confidence in U.S. debt.
Treasury Department officials have warned for months that a government default could trigger a financial crisis, but there is no real precedent pointing to what is likely to happen.
The main tension in the talks involves the duration of a debt ceiling increase.
Democrats say a six-month increase in the government's $14.29 trillion debt ceiling would introduce too much uncertainty into financial markets. President Barack Obama met with Mr. Reid and House Minority Leader Nancy Pelosi (D., Calif) Sunday evening, and all three repeated their opposition to a short-term debt-ceiling increase, a White House official said.
Mr. Boehner's plan for a committee to recommend deficit-reduction plans doesn't address the fundamental roadblock to a deal being reached over the weekend between congressional Democrats and Republicans.
If a majority of the committee fails to vote in favor of its deficit-reduction recommendations, or if Congress fails to approve it in subsequent votes, there would be no guarantee the debt ceiling would be raised.
The Democrats have argued this would set up another round of bitter fighting about how to avoid a potential default by the federal government in an election year, a situation they are determined to avoid.
Assuming the committee was able to agree to a plan, and Congress subsequently approved it, the Boehner legislation would then state that Mr. Obama could request a debt limit increase less than $1.5 trillion, which would then be subject to a further vote by Congress.
Like an earlier proposal that originated in the Senate, the votes would be structured in a complicated procedure to allow them to be approved even if only a minority of lawmakers voted in favor of them.
The Boehner plan also calls on Congress to hold a vote on a balanced-budget amendment, long a demand of conservative Republicans.
Republicans see the need for a second debt-limit increase before the 2012 election as a way to keep their leverage and ensure that sweeping spending cuts are enacted. Democrats, including Mr. Obama, want to avoid revisiting this debate until after the election.
Large banks, even though they believe the chance of a default is low, are mapping out contingency plans. Bank of America Corp. has teams across the company looking at what the impact of a default would be on their customers and clients, a bank official said. J.P. Morgan Chase & Co. is doing a similar analysis, looking at what the impact of a default or downgrade would be on their customers, their access to funding and Treasury markets.
China, the largest foreign holder of U.S. Treasurys, has repeatedly expressed concern in official diplomatic communications over the possibility the U.S. would default on its debt, a senior State Department official said.