In the wake of House Speaker John Boehner’s decision to seek a smaller deficit reduction deal rather than the $4 trillion goal that President Barack Obama was aiming for, Treasury Secretary Tim Geithner said Sunday on NBC’s “Meet the Press” that Republicans “should not walk away now from trying to do something good for the country.”

With the government's borrowing capacity now capped at $14.3 trillion, a deficit cutting deal is essential to persuading enough Republicans in Congress to vote to increase the debt limit before it is reached in early August.

Obama willing to do 'difficult things'
Geithner said Obama “is willing to do very, very difficult political things” including changes in the Medicaid and Medicare programs to reduce future outlays.

He did not specify any changes Obama would consider in those two programs, or in Social Security. Those three programs will account for half of federal outlays by 2021.
Will there be cuts to Medicare, Medicaid?
The protected debt negotiations took another twist Saturday when Boehner issued a statement saying, that "despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes."

Given that impasse, Boehner said, "I believe the best approach may be to focus on producing a smaller measure."

Obama will met again at the White House Sunday evening with Boehner and other congressional leaders to figure out how to restart the negotiations and perhaps aim for a more modest accord than what he'd envisioned last week.

“We’re going to try to get the biggest deal possible,” Geithner said.

Why GOP leaders need Democratic votes
“Republicans have told us from the beginning they can’t pass a debt limit increase, they can’t pass a budget deal just with Republican votes. They need Democratic votes,” added Geithner.

Wooing enough Democratic members of Congress to vote for a budget deal, Geithner implied, required Republican leaders to accept that some net tax increases would need to be part of any agreement.

“You have to have balance,” he said, indicating an accord which had nearly equal measures of cuts in future spending and increases in revenues.

But at the same time, he said, “we have to find a way to avoid shifting more of the burden of the tax system to the middle class” — which seemed to indicate that any net tax increases would fall only on higher-income people.

He said an extension of the Social Security payroll tax cut, which Congress enacted last December and which is set to expire at the end of this year, would be part of any accord.

That payroll tax cut was intended to stimulate economic growth and spur job creation. But Geithner gave a somber assessment of the economy, saying that "it's going to take a long time still" before many Americans feel that a recovery is under way. "This is still a very tough economy. For a lot of people, it's going to feel very hard — harder than anything they've experienced in a lifetime now — for some time to come."

What happens after Aug. 2
Geithner warned again that if no deficit cutting agreement is reached and if Congress still refuses to increase the government’s borrowing limit, the government will face default on its obligations on Aug. 2 which “would be catastrophic for the American economy.”
Story: Presidential candidates warn about compromise in debt deal

He added, “The longer we go into July, the more risk there will be in financial markets” with increasing fear among investors that America’s political leaders cannot manage the government’s finances. “You’ll see that reflected in higher interest rates and more concern and loss of confidence,” he said.
Video: Geithner explains what really happens on Aug. 2 (on this page)

He said with no ability to borrow more money from credit markets, it would impossible for the government to finance the $100 billion a week in maturing Treasury obligations — while at the same time paying government contractors and sending benefits to those on Social Security, Medicare and Medicaid.

He seemed to reject the idea that Obama would resort to the Fourteenth Amendment to the Constitution to justify Obama borrowing despite having reached the legal limit — a suggestion some Democrats floated in recent weeks. “There’s no constitutional option,” he said.

Obama's goal: a one-third cut in cumulative deficits
Obama’s goal last week of deficit cuts of $4 trillion over the next decade would have been about a one-third cut in the cumulative deficits, according to the Congressional Budget Office’s most plausible forecast.
Video: Geithner on deal: Obama’s ‘going to keep at it’ (on this page)

Obama was said to be open to changes in Social Security, Medicaid and Medicare. One idea reportedly under discussion in the budget talks was a change in the formula used to make the cost-of-living adjustment (COLA) for retirees collecting Social Security benefits so as to reduce payouts to retirees in future decades.
Story: Who is blocking a grand debt deal? Democrats, too, have limits

The stakes are high for Obama. His 2012 re-election hopes hinge not only on reducing America's 9.2 percent unemployment but on his appeal to independent voters who want tougher action to get the country's fiscal house in order.

But Boehner and other mainstream Republicans do not want to be blamed for the economic turmoil that could be unleashed by any government default on its debt.

For his part, Obama is risking a mutiny on the left flank of his party for even agreeing to discuss entitlement programs traditionally protected by Democrats and which many feared would have been curbed under a $4 trillion plan.
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