Obama, Congressional Leaders Eye Sweeping Bargain to Cut Deficit by $4 Trillion

President Barack Obama and congressional leaders agreed Thursday to strive for a blockbuster deficit-reduction deal and will spend the weekend determining whether political support is possible for a sweeping plan to curb entitlements and make major tax-code changes.

The package to reduce the federal deficit by $4 trillion or more over 10 years is much more ambitious than negotiators envisioned just two weeks ago, and represents the most far-reaching of three options Mr. Obama presented to lawmakers Thursday in a closed-door meeting in the White House Cabinet Room.

To achieve such a reduction, negotiators likely would have to agree to spending cuts for domestic programs, defense and entitlement programs such as Medicare and Medicaid, as well as boost tax revenues. Most negotiators agree that spending reductions would outweigh any new revenues by a sizable margin, though significant reductions in tax breaks and deductions for businesses also likely would be part of the mix.

Such a deal would have to overcome many hurdles to pass a divided Congress in time to clear the way for a vote to raise the government’s $14.29 trillion borrowing limit before Aug. 2. Treasury Department officials say that without a higher debt ceiling the government will begin to default on its obligations, including debt payments.

Investors in U.S. Treasurys aren’t betting that a major deal is going to solve the U.S. debt problem in one fell swoop.

Nor do bond buyers appear worried that a deal won’t be reached. While yields—which rise when prices fall—have risen on better-than-expected economic data lately, they still remain low by historical standards. Late Thursday, as stocks jumped, investors pushed down the price of the benchmark 10-year note 15/32 to yield 3.151%.

While lawmakers in both parties cheered the idea of a big deficit-reduction deal, they dug in their heels on several key issues. Liberal Democrats are furious that Mr. Obama has opened the door to significant changes to Medicare, Medicaid and Social Security, and many Republicans continue to resist tax increases.

One major proposal under consideration is to alter the way the federal benefits and taxes are adjusted for inflation. Another proposal being discussed would permanently change the alternative minimum tax so it doesn’t hit millions of middle-income Americans.

House Speaker John Boehner (R., Ohio), who met with Mr. Obama and other congressional leaders at the White House Thursday, told his Republican colleagues the parties will know in a matter of days if a large deal is possible and gave the prospects of one a 50-50 chance.

Mr. Obama sounded optimistic about reaching deal, but acknowledged in brief comments to reporters that Democrats and Republicans “are still far apart on a wide range of issues.”

Staff members from the White House and Congress will work on drafting an agreement through Saturday. Mr. Obama will then meet with congressional leaders at the White House Sunday, a meeting that is expected to last most of the afternoon and into the evening.

“At that point, the parties will at least know where each other’s bottom lines are and will hopefully be in a position to then start engaging in the hard bargaining that’s necessary to get a deal done,” Mr. Obama said after Thursday’s White House meeting. “Everybody acknowledged that there’s going to be pain involved politically on all sides.”

The White House needs a deficit reduction agreement to get enough votes in Congress to raise the debt ceiling and avoid default, which leaders from both parties say could trigger another economic recession. Administration officials have said the parties must reach a deal by July 22 to give legislation time to get through the Republican-controlled House and Democratic-led Senate.

Until this week, White House officials and congressional leaders had been looking at a deficit reduction package of a roughly $2 trillion over 10 years and were at an impasse over taxes. But the idea of a grand plan that would tackle the sticking points on both sides gained traction last weekend when Messrs. Obama and Boehner met secretly at the White House.

Mr. Obama told lawmakers Thursday he wouldn’t sign any agreement that does not extend the debt ceiling through the 2012 election, people briefed on the meeting said. He then presented lawmakers with three options, these people said: a small deal that would shrink the federal deficit by just over $2 trillion over 10 years that would be accompanied by a vote to raise the debt ceiling through November 2012; a $3 trillion deal; and deal in the range of $4 trillion.

The larger deal could tether entitlement program changes to a broad tax overhaul that would end tax breaks to generate the revenue Democrats want in exchange for lowering individual and corporate rates, which Republicans want.

Most of the eight lawmakers in the room favored the largest option, people familiar with the meeting said, though a few favored the $3 trillion choice. Sen. Jon Kyl (R., Ariz.), and Rep. Eric Cantor (R., Va.) said they would prefer the biggest deficit cut possible but do not think it’s achievable, people familiar with the exchange said.

Mr. Cantor, though, balked at Mr. Obama’s plan to include more than $1 trillion in tax increases, Mr. Cantor’s spokesman, Brad Dayspring, said.

House Minority Leader Nancy Pelosi (D., Calif.) and House Democratic Whip Steny Hoyer (D., Md.) told the president they’re in favor of the biggest deal, but raised House Democrats’ concerns about cuts to Social Security and Medicare, people briefed on the meeting said.

Ms. Pelosi and other Democrats later said they’re open to changes so long as they do not cut benefits—and that they be enacted separately from a deficit deal.

A bigger deal also carries risks for Mr. Boehner. Any openness to tax increases pits the speaker against the conservative wing of his caucus. The speaker assured colleagues he is not giving ground on the GOP pledge to oppose tax increases.

But some of the most conservative GOP members—including freshmen elected in 2010 with tea-party support—may oppose any debt-limit deal even with a $4 trillion deficit-reduction deal attached.

The Republican Study Committee, a large conservative faction in the House, is demanding even deeper spending cuts, strict spending caps, and a constitutional balanced-budget amendment as a condition of raising the debt limit.