Republicans acknowledged on Thursday they will have to sign off on more deficit spending to avoid a debt default that would roil financial markets and bring the government to a grinding halt.
Treasury Secretary Timothy Geithner pressed lawmakers to raise the nation's $14.3 trillion debt limit to allow the United States to borrow more and avert a crisis in the coming months.
House Budget Committee Chairman Paul Ryan, a Republican, said he recognized the need to allow the government to go deeper in debt.
Will the debt ceiling ... have to be raised? Yes, said Ryan, who leads Republican efforts to slash deficit spending.
But he called for deep spending cuts in 2012 and the Pentagon announced it would trim its budget by $78 billion as both government and opposition in Washington vied to outdo each other in promises of tighter spending.
Geithner said the federal government may hit the ceiling by March 31 on the amount of debt it is legally allowed to issue, and urged Congress to raise it before then to avoid pushing the United States into default.
Even a short-term or limited default would have catastrophic economic consequences that would last for decades, Geithner said in a letter to Senate Majority Leader Harry Reid, a Democrat.
Republicans won control of the House of Representatives in November elections on a promise to cut government spending and reduce debt but are faced with having to compromise on the debt limit.
They say any vote to increase the ceiling must be paired with a commitment to lower federal costs over the long term.
The American people will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending, House Speaker John Boehner said.
A debt default would throw markets into turmoil and dramatically increase government borrowing costs for years to come, further increasing the U.S. debt burden and sapping resources from the economy.
Bond investors remain wary of the safety and soundness of sovereign debt after the bailouts of Greece and Ireland last year, but Treasury officials said they did not see any evidence of such concerns pushing up U.S. debt yields at this time.
A Treasury official urged lawmakers preparing for a new budget not to mix up the debt limit issue with calls for greater restraint in government spending.
The official, who spoke on condition of anonymity, expressed confidence that Congress will raise the debt limit if only because not doing so would be so damaging.
If you look over the long history of these things, they kick up a fair amount of dust and noise but in the end cooler heads prevail and responsibility wins out and the debt limit is always increased, the official said.
The closest the United States has come a debt limit default was in 1995, when Republicans led by then-House Speaker Newt Gingrich forced a partial government shut down over the issue.
Congress has routinely voted to raise the debt limit every year since 2002.
In recent years, House lawmakers have been able to automatically approve a debt-limit increase when they pass their annual budget blueprint, but that maneuver will not be possible under new rules passed by Republicans on Wednesday.
Now that Republicans wield greater clout on Capitol Hill, it will be up to them to ensure the measure passes the House. Many rank-and-file Republicans may be reluctant to go along for fear of angering conservative Tea Party activists who helped them to victory last year.
Ryan said he would unveil $60 billion in immediate spending cuts over the coming weeks and push for even deeper cuts in the fiscal year that starts in October.
The Obama administration has proposed cuts of its own, including a pay freeze for federal workers and $78 billion from military spending over five years announced on Thursday.
That includes a reduction of up to 47,000 troops.
As the biggest part of the discretionary federal budget, the Pentagon cannot presume to exempt itself from the scrutiny and pressure faced by the rest of our government, Defense Secretary Robert Gates said.
The Republicans on Thursday notched up their first legislative victory on spending this session when the House approved a motion to trim its expenses by 5 percent, an effort that will yield $35 million in savings.
While minor in terms of money, the vote marked one of the first salvos in a fight over spending that is set to dominate the political landscape in coming months.
Republicans have promised to roll back federal spending to 2008 levels, an effort they are eager to showcase as a way to pare budget deficits that have reached 9 percent of GDP in recent years, far above the 4 percent figure that many economists consider sustainable.
(Additional reporting by Richard Cowan and Emily Kaiser; Editing by Alistair Bell)