GOP SHIFTS FOCUS TO DEBT LIMIT

With the federal government shutdown in its third day, both sides of the dispute that started with a Republican drive to end Obamacare shifted their focus Thursday to the next fiscal deadline: the need to raise the debt limit by mid-October to avoid a default.

House Speaker John A. Boehner (R-Ohio) has made it clear he cannot muster enough votes from his Republican majority to reopen government with a no-strings-attached funding bill, as President Obama wants, or to raise the nation’s debt ceiling to continue paying the nation’s bills beyond Oct. 17.

Rather than buck the tea party flank and reach across the aisle for Democratic votes to pass both measures, House Republicans have decided to change their focus to the debt limit deadline in hopes of reaching a compromise with Democrats on rolling back the size and scope of the federal government.

Democrats are skeptical that Boehner can make a big budget deal after past attempts at a “grand bargain” failed, and have publicly said they would not negotiate any substantive changes until after Republicans agree to reopen federal agencies and raise the government’s debt limit. That all but ensures there will be no quick resolution to the federal government shutdown, which has furloughed 800,000 workers and closed all nonessential government operations, including popular national parks and museums.

In the last major standoff over the debt ceiling, in 2011, the two sides agreed to paper over their inability to agree by creating a new committee to debate budget changes. Whether they can find a similar mechanism that would save face for both sides may determine whether the government can avoid an economically damaging default on its debt.

One point was clear, though, after Boehner gathered a lunchtime meeting Thursday of his kitchen cabinet: The Republicans have sidelined their demand to end the Affordable Care Act in favor of other long-standing GOP priorities, including cuts to Medicare and Social Security.

“The speaker’s trying to get to a broad budget deal,” said Rep. Charles Boustany Jr. (R-La.). “Obamacare’s just part of it. We’re going to try to get what we can, but we understand that’s the president’s legacy. The bigger problem facing the country, in my mind, is the debt, and the fact that we have entitlement programs that are still growing without end in sight. And we need tax reform.”

The debt deadline creates a pressure point that provides the type of governmental crisis that has produced bipartisan agreements in the past. But trust between the parties has deteriorated to such an extent that neither side has great optimism a major deal could be reached before the debt ceiling must be lifted.

Thursday, the Treasury Department warned that a default could trigger a worse financial crisis than in 2008.

“A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” it said in the six-page report on the potential effects on the economy of a debt ceiling impasse.

The report also noted that private economists have estimated a weeklong government shutdown could reduce economic output by about 0.25 of a percentage point, with a longer shutdown having a greater effect.

The federal government has never defaulted on its payments, so the closest historical comparison is the debt limit fight in 2011, the Treasury report said. That was resolved at the last minute but led to a sharp drop in the financial markets, as well as a loss in consumer and business confidence.

“As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy,” Treasury Secretary Jacob J. Lew said.

Obama told congressional leaders at a 90-minute meeting Wednesday night that he would not negotiate over the shutdown or the debt limit, but would enter into broader budget negotiations after those threats were put to rest.

“Open the government, and we’ll negotiate with you on anything you want to negotiate,” Senate Majority Leader Harry Reid (D-Nev.) said Thursday.

Earlier in the week, Boehner sought to calm some moderate-minded Republicans who appeared ready to end the shutdown by forcing a vote on a government-funding measure that did not repeal any elements of Obama’s healthcare law.

On Thursday, Democrats seized on news reports that the speaker had assured some of the moderates that he would not allow the government to default and would rely on Democratic votes if needed to raise the debt ceiling. Boehner’s spokesman, however, said that while the speaker had conceded he would need Democratic votes, he had not promised to do anything that a majority of his caucus would not support.

Top House Republicans are working on the demands the GOP will make in exchange for raising the debt limit and reopening government, according to those familiar with the internal strategy.

Still smarting from Boehner’s past failed efforts to negotiate a budget deal with the White House, Republicans have shied away from calling any new deal a “grand bargain.”

Rather, they see it as a “big down payment” toward trimming the nation’s deficits, preferring the language of Rep. Paul D. Ryan (R-Wis.), the GOP’s leader on budget issues and the former vice presidential nominee.

Following Ryan’s lead, Republicans are expected to revisit the components of past budget battles: cuts to Medicare, Social Security and other entitlement programs, as well as reforming the tax code, a long-standing interest. They may also seek to gain the Obama administration’s approval of the Keystone XL oil pipeline between Canada and the United States, as well as pursue smaller changes to the healthcare law, including repeal of the tax on medical-device makers and an end to the individual patient advisory board.

“To me this is much more about the debt ceiling and a larger budget agreement than it is about Obamacare -- that almost gets in the way of the debate,” said Rep. Tom Cole (R-Okla.).

Cole noted that some Republicans would vote to raise the debt limit, but at a price. “If you’re a Republican member, you can’t raise the debt ceiling and go home without having done something on the deficit,” he said. “I won’t do it just for nothing.”

But Obama has rejected past GOP efforts to cut spending on Medicare and other popular government programs unless Republicans offer new tax revenues as well -- a stalemate that remains unresolved.

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lisa.mascaro@latimes.com

michael.memoli@latimes.com

Jim Puzzanghera in the Washington bureau contributed to this report.