(Reuters) – U.S. budget talks collapsed on Thursday after Republican negotiators walked out, throwing doubt on Washington’s ability to reach a deal that would allow the government to keep borrowing and avoid a debt default.
Representative Eric Cantor, the No. 2 Republican in the House of Representatives, said participants had identified trillions of dollars in potential spending cuts but were deadlocked over tax increases sought by Democrats. Republican Senator Jon Kyl also pulled out, according to an aide.
“Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue,” Cantor said in a statement.
House Speaker John Boehner, the top Republican in Washington, said Democrats must take tax hikes off the table.
“These conversations could continue if they take the tax hikes out of the conversation,” Boehner said.
Negotiators had hoped to reach a budget deal by next week that would give lawmakers political cover to raise the $14.3 trillion debt ceiling before the Treasury Department runs out of money to pay the country’s bills.
Default could occur if Congress does not act by August 2, pushing the United States back into recession and sending markets plunging around the globe.
So far, that possibility hasn’t affected bond markets as investors focus on other news and assume that Washington will ultimately strike a deal. But that probably won’t come until the last minute, analysts said.
The talks are “not dead but they are on life support,” said Greg Valliere, a political analyst for investors at Potomac Research Group. “This is going to look ugly for the next few weeks.”
DEAL NOT NECESSARILY OUT OF REACH
Vice President Joe Biden was still scheduled to come to Capitol Hill on Thursday, where he will meet with fellow Democrats now that the two Republican members of his deficit-cutting group have dropped out.
The breakdown in talks does not mean that a deal is out of reach. Participants had expected Boehner and President Barack Obama to handle the final negotiations — a step that now may occur sooner than anticipated.
Cantor had given little indication that the talks had hit a wall. After Wednesday’s session, he said he looked forward to talks on Thursday and Friday and indicated that the group was making progress.
“Obviously if we weren’t, we wouldn’t be meeting again,” he told reporters.
His withdrawal caught Democrats by surprise, coming as Obama met with House Democratic leaders at the White House before the afternoon’s negotiating session.
“Until our Republican colleagues are more concerned about our need to reduce the deficit than what Grover Norquist has to say, we will have a difficult time,” said Democratic Representative Chris Van Hollen, referring to a prominent anti-tax activist.
Republicans have said from the outset that any tax increases will not pass the House. But Democrats thought wiggle room might be possible after Senate Republicans voted to close a tax break for ethanol last week, defying Norquist and other anti-tax activists.
In recent sessions, Democrats have pressed to close a wide range of tax breaks, from oil and gas subsidies to breaks that benefit wealthy individuals. Negotiators had reached tentative agreement on cuts to health benefits, annual spending, other benefits like farm subsidies and tuition aid, and automatic limits on future spending, according to an aide familiar with the discussions. But Democrats would not relent on taxes, the aide said.
REPUBLICANS MAY NOT HAVE THE VOTES
Republicans may not have enough votes to pass a deal through the House in any case, as many newly elected conservatives feel little urge to compromise.
That means Boehner may have to rely on Democratic votes, and Democrats will insist that tax increases must be part of the deal, one lawmaker said.
“I think we walk away unless there’s some revenue raisers,” Democratic Representative Allyson Schwartz said at a breakfast event hosted by Third Way, a centrist think tank. “It is going to take a bipartisan effort to get this done. That’s something Republicans need to realize and we’re not there yet.”
The decision to leave the talks may be an effort to buy some breathing room from his right flank, one analyst said.
“One can hope Cantor, by leaving the talks, is just trying to shore up his reputation with the hotheads in the House before actually coming to an agreement,” said Cary Leahey, managing director of Decision Economics in New York.
Cantor and Boehner may need to allow a debt-ceiling vote to fail before they can craft a compromise, budget expert Stan Collender said. That could provide a jolt to markets akin to the failed bank bailout vote of 2008, which caused the Dow Jones Industrial Average to drop 800 points.
“There may need to be a negative market reaction to that vote to get Republicans to move from their current position,” said Collender, a budget analyst with Qorvis Communications.
One Democratic aide said Cantor recognizes that tax increases will have to ultimately be part of any deal but that he did not want to be the one to say so.
“Cantor just threw Boehner under the bus,” the aide said.