By Richard Cowan and David Morgan

WASHINGTON (Reuters) – Detailed talks on raising the U.S. government’s $31.4 trillion debt ceiling kicked off on Wednesday with Republicans continuing to insist on spending cuts, the day after Democratic President Joe Biden and top congressional Republican Kevin McCarthy’s first meeting in three months.

Time is tight to avoid a historic, economically destabilizing default on government debt, which the Treasury Department has warned could come as soon as June 1. But some areas of potential compromise emerged after a White House meeting on Tuesday.

The standoff has rattled investors, sending the cost of insuring exposure to U.S. government debt to record highs, as Wall Street grows more concerned about the risks of an unprecedented default.

Graphic: Debt ceiling fight historically fans credit rating concerns – https://www.reuters.com/graphics/USA-DEBT/zdpxdwdkrpx/graphic.jpg

Also on Wednesday, the Treasury Department announced that government tax receipts for April confirm a recent trend of declining revenue, which, coupled with higher outlays, likely adds to pressure on Congress to reach a debt limit deal promptly.

“If lawmakers ever needed a wake-up call, this is it. Meager tax revenue is exactly the kind of news we don’t need right now,” said Maya MacGuineas, president of the nonprofit Committee for a Responsible Federal Budget.

She noted that April is one of the few times the Treasury records a surplus “and yet a $176 billion surplus will matter very little when we’re borrowing $4.2 billion per day this fiscal year.”

Graphic: Up against the limit – https://www.reuters.com/graphics/USA-DEBT/LIMIT/zgvobebqnpd/chart_eikon.jpg

Some lawmakers were upbeat about the start of negotiations. “Sounds to me like the dance has begun,” said Republican Representative Frank Lucas. He added that Republicans in the House of Representatives were unlikely to win the scope of budget cuts they have proposed, but that a middle ground could be found to slow what he called Democrats’ “spending binge.”

Deep disagreements remained over competing pressures for spending cuts versus tax increases.

Biden signaled an openness to Republicans’ demand to claw back some unused money for COVID-19 relief, which is less than $80 billion. Meanwhile, the White House reiterated its backing for legislation speeding government permitting of energy projects by setting maximum timelines.

A White House fact sheet distributed on Wednesday said the administration “supports the important reforms” contained in a bill by Democratic Senator Joe Manchin. Republicans have not endorsed that bill but say permitting reforms would help the U.S. maintain its edge in oil and gas development. Democrats see it as boosting the development of “clean” power projects.

Aides for Biden, McCarthy, Democratic Senate Majority Leader Chuck Schumer, top Senate Republican Mitch McConnell and top House Democrat Hakeem Jeffries were expected to meet Wednesday afternoon and again Thursday, before a Friday meeting Biden has called with the four congressional leaders.

“Default is not an option,” Biden told reporters after Tuesday’s meeting. “I told congressional leaders I’m prepared to begin a separate discussion about my budget.”

CLEAN DISPUTE

Biden and opposition Republicans have been locked in a standoff for months over the debt ceiling, with Democrats calling for a “clean” increase without conditions to pay debts resulting from spending and tax cuts approved by Congress.

House and Senate Republicans, meanwhile, have said they will not authorize any additional borrowing without an agreement to cut future spending.

Adding to the urgency, Biden is scheduled to leave on May 18 for an annual meeting of leaders of the Group of Seven major industrialized nations, though he said he would cancel that trip if needed to work on a debt limit deal.

Rohit Kumar, a former Senate aide who is now co-leader of PwC’s national tax office in Washington, said he views Biden’s upcoming trip as a possible deadline for a framework agreement that could ultimately serve as the basis for legislation.

“To me, the real action is probably going to happen next week with the president’s departure for Japan for the G-7 meeting. That would be the near-term action-forcing event,” Kumar said.

Even with significant progress, the House and Senate each have time-consuming procedures for often advancing legislation that opponents of any deal could use to delay passage.

The last time the nation got this close to default was in 2011 – also with a Democratic president and Senate with a Republican-led House.

(Reporting by Richard Cowan, Katharine Jackson and David Morgan; Additional reporting by Moira Warburton, Timothy Gardner and David Lawder; Editing by Scott Malone and Jonathan Oatis)

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