WASHINGTON (Reuters) - Efforts to craft a broad $3 trillion deficit-reduction deal gained traction on Thursday as the White House and top lawmakers scrambled to sort through competing options and stave off a devastating U.S. default.

With the clock ticking toward an August 2 deadline to raise the U.S. debt ceiling, President Barack Obama and the senior Republican in Congress, House Speaker John Boehner, worked toward a budget plan that would include deep spending cuts but might leave tax reform for later, congressional aides said.

The main obstacle remained the issue of tax increases that Obama's Democrats want and Republicans vehemently oppose. There were conflicting accounts of how and when higher revenue might kick in, and the White House vowed there would be no deal without this.

The main focus was on prospects for what congressional sources said was shaping up as $3 trillion in deficit cuts over 10 years, a figure that many in Washington hope would help salvage America's triple-A credit rating. Rating agencies have called for a comprehensive deficit-cutting deal.

Negotiators have struggled to break their impasse and winnow options for raising the government's $14.3 trillion debt ceiling. Failure to reach a deal to increase U.S. borrowing authority would render the world's biggest economy unable to pay all of its bills.

But confusion has grown amid a patchwork of proposals aimed at finding what a senior Democratic aide called the "magic formula" for resolving the crisis, which has dominated Washington's agenda for weeks.

"Frankly, we've looked at a half a dozen fallback plans, none of which are all that appetizing," Boehner -- struggling with Tea Party lawmakers largely opposed to any compromise with Obama -- told conservative talk-show host Rush Limbaugh.

White House spokesman Jay Carney said there had been momentum toward a "balanced" deficit agreement, but he insisted: "We are not close to a deal."

What remained clear was that both sides were still far apart over the thorniest issue on the table -- taxes.

Obama, in an interview with National Public Radio, said any deal must include some tax increases alongside defense and other spending cuts. Many Republicans have vowed to oppose any kind of tax hikes, while Democrats have insisted on higher taxes for wealthier Americans.


"We're also going to have to have more revenues and we can do that in a way that is not hurting the economy (and) in fact could potentially help the economy by closing up some loopholes that distort the economy," Obama said in excerpts of the interview released by NPR.

While they could leave comprehensive tax reform for later, Obama and Congress could agree to revenue increases that would end some select tax breaks, such as special breaks enjoyed by ethanol blenders, some Wall Street investors and companies that operate corporate jets.

Despite the gulf between the two sides, reports that negotiators were starting to close in a debt deal helped fuel a rally in U.S. and world stocks on Thursday. The Dow Jones industrial average ended 152 points, or 1.2 percent, higher at 12,724.

Adding pressure on the debt talks, Standard & Poor's reiterated that there is a 50-50 chance the U.S. top-notch credit rating could be cut within three months, perhaps as soon as August, even if default is avoided, should the government not also take significant measures to tackle deficits.

If Congress fails to raise the debt ceiling in time, the United States would default on its obligations, possibly plunging the country back into recession and sparking a crisis in financial markets worldwide.

Obama, in an opinion piece on the USA Today newspaper's website, appealed for compromise and urged lawmakers to do "something big and meaningful" on debt reduction. He met Democratic leaders at the White House late in the day.

Still in play is a plan authored by the bipartisan "Gang of Six" senators to cut $3.7 trillion off the deficit and a fallback option put forward by Senate Republican leader Mitch McConnell. Both seem to have lost much of their momentum.

Congressional aides said the parameters of any potential agreement remained fluid. "The focus remains ... on trying to get a grand bargain," Representative Chris Van Hollen, one of the Democrats in previous talks, said on MSNBC.

The White House, which initially set a July 22 target for a deal, said on Wednesday Obama was open to a short-term extension of the debt ceiling if lawmakers agreed to a broad deficit reduction plan but needed more time to pass it.

House Republicans remained the key hurdle to a deal, and drama was unfolding within their ranks over whether they had been given a loophole in their "no tax" pledge that could allow them to support a long-term deficit reduction deal.

Boehner said he had warned fellow Republicans they would have to accept some compromise. "At the end of the day, we have a responsibility to act," he told reporters.

Grover Norquist, founder of Americans for Tax Reform and author of a "no tax" pledge most Republican lawmakers have signed, gave conservatives a potential out on that promise.

In comments to the Washington Post editorial board, Norquist said allowing the George W. Bush-era tax cuts on personal income to expire would not constitute a violation of the pledge. He later told MSNBC he would oppose any change to those taxes but that there were ways technically to not violate the pledge.

(Additional reporting by Donna Smith, Richard Cowan and Thomas Ferraro, Caren Bohan; Writing by Matt Spetalnick and Deborah Charles; Editing by Vicki Allen)

Source: Reuters US Online Report Top News

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