President Barack Obama asked U.S. congressional leaders from both parties to the White House on Wednesday for an urgent round of budget talks to avert a government shutdown.
With the clock ticking toward a midnight Friday deadline, Obama invited House of Representatives Speaker John Boehner, a Republican, and Senate Democratic Leader Harry Reid to meet him at 8:45 p.m. EDT for another round of talks.
Republicans and Democrats said negotiators were making progress on a compromise that would fund government operations past Friday's deadline and keep more than 800,000 workers in their jobs.
I think we've made some progress, Boehner told reporters, adding negotiations are not finished by a long shot.
The two parties remain at odds over about $10 billion in spending cuts, a Democratic aide said.
The final size of the cuts for the remainder of this fiscal year will likely end up closer to the $33 billion Democrats have agreed on than the Republicans' $40 billion target, the 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.
A FAILURE OF LEADERSHIP
Boehner criticized Obama for a failure of leadership in the budget showdown and said the House on Thursday will consider a short-term bill to cut an additional $12 billion in spending and fund the government for another week while negotiations continued.
Obama and many of his fellow Democrats oppose another short-term extension. Some Republicans said it could serve as a legislative vehicle for a final budget deal.
That's not just bad policy, that's a fantasy, Reid said of the temporary extension. He said it would only put off the tough choices needed to reach a deal on the budget.
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.
The investment firm Goldman Sachs estimated a government shutdown lasting more than a week could cost the economy $8 billion in missed federal spending, dragging down growth.
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.
Reid said the budget talks were constantly evolving and accused Republicans of changing the terms of the debate ahead of the midnight Friday deadline.
'MOVING THE MIDDLE'
Every time we agree to meet in the middle they move where the middle is, Reid said. We stand here with fewer than 72 hours on the clock ... It's time to get the job done.
Negotiators had tentatively agreed on a figure of $33 billion in spending cuts earlier this week, but Boehner is now pushing for a target of $40 billion.
A Republican aide said staff negotiators have made progress toward a compromise on the Republican push for policy riders such as reducing abortion funding, blocking funds for the healthcare overhaul and halting the Environmental Protection Agency's greenhouse gas rules.
A Democratic aide said the price tag could go higher if Democrats were able to exclude those riders. Democrats also are pushing for cuts to the Pentagon and other security programs.
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.
A new Wall Street Journal/NBC News poll found Tea Party conservatives backed deep budget cuts without any compromise by 68 percent to 28 percent, while the broader Republican electorate splits 48 percent to 47 percent over the issue.
As the fight over spending for this fiscal 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 a plan by Paul Ryan, the committee chairman and a Republican, 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, Deborah Charles and Paul Simao)