The following is a rush transcript of the July 10, 2011 edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

BRET BAIER, GUEST HOST: I'm Bret Baier, in for Chris Wallace.

The debt ceiling negotiations hit a snag.

As President Obama and congressional leaders work overtime to forge a deal, we'll get a progress report from the Senate Republican Leader Mitch McConnell, and from top House Democrat, Congressman Xavier Becerra.

Then, after reshaping the political landscape, the Tea Party looks ahead to the 2012 presidential race. We'll talk about the campaign and size and scope of government with the man called Senator Tea Party, Jim DeMint.

Also, a stunning unemployment report send shockwaves down Main Street and Wall Street. We'll ask our Sunday panel how damaging the numbers are with the president.

All right now on "Fox News Sunday."

Hello again from Fox News in Washington.

Late Saturday, there was a major development in the debt ceiling negotiations. Speaker of House John Boehner issued this statement, asking for a smaller package instead of the bigger grand bargain. Quote, "Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes. I believe the best approach may be to focus on producing a smaller measure based on the cuts identified in the Biden-led negotiations."

White House communications director Dan Pfeiffer responded with this, quote, "The president believes that now is the moment to rise above that cynicism and show the American people that we can still do big things. And so, he will make the case to congressional leaders that we must reject politics of least resistance and take on this critical challenge."

Joining us now is the Senate's top Republican, who will be a key participant in today's talks. Senator Mitch McConnell.

Welcome back to "Fox News Sunday," Senator.

SENATE MINORITY LEADER MITCH MCCONNELL, R-KY.: Glad to be here.

BAIER: Let's start with what happened and from your perspective, where do things stand now ahead of this meeting tonight at the White House?

MCCONNELL: Well, unfortunately, as the speaker said, insisting on the White House and congressional and Democrats insisting on really big tax increases as a condition to do anything on the spending side, we believe the president was right back in December when he signed the two-year extension of the current tax rates that raising taxes in the middle of this economic situation we're in is a terrible idea. Let me just look at the unemployment figures last Friday. All the arguments the president used in December still today were today. There's an additional issue addition to unemployment at work here is what kind of government do you want to have?

And if you look back at the last two and a half years, you see the government running banks, insurance companies, car companies, national housing loan business, taken over healthcare, trying to take over the Internet, increasing spending, discretionary spending 24 percent, increasing debt 35 percent. What -- how big a government do we want? And we don't want to use this opportunity presented by the president's request of us to raise the debt ceiling to kind of freeze perpetuity this much government. I don't thin the American people want it. I don't think it's good for the economy.

BAIER: So, is the big deal, a $4 trillion deal now off the table?

MCCONNELL: Well, I think it is because everything they told me and the speaker is that to get a big package would require a big tax increases in the middle of economic situation that's extraordinarily difficult with 9.2 percent unemployment. We think it's a terrible idea. It's a job-killer.

BAIER: I mean, you mention the unemployment rate. It came out Friday, 9.2 percent. Uptick, 18,000 jobs only created in June.

Your opinion how much has the jobs report affected negotiations?

MCCONNELL: Well, it incentivizes us do a big package without raising taxes. But unfortunately, I think the president is not thinking the same thing he did six months ago when the economy didn't seem to me as bad as it is today and he was making arguments that raising taxes in the middle of this recession or slowdown, whatever you want to call it, was a bad idea.

BAIER: Before the development Saturday, Democrats were very upset that the White House was talking about Social Security and Medicare and Medicaid, the entitlements, putting on the table.

Here's House Minority Leader Nancy Pelosi.

(BEGIN VIDEO CLIP)

HOUSE MINORITY LEADER REP. NANCY PELOSI, D-CALIF.: We want to, of course, reduce the deficit as we grow the economy. We are not going to reduce the deficit or subsidize tax cuts for the rich on the backs of America's seniors and working families. No benefit cuts in Medicare and Social Security.

(END VIDEO CLIP)

BAIER: So, the question is: can you to get to even a smaller package, let's say $2.5 trillion without touching Medicare and Social Security? MCCONNELL: Well, look, over 60 percent our budget we don't even vote on. It's popular entitlement programs like Social Security, Medicare, Medicaid and interest payments. You can't do anything serious about our deficit without impacting the biggest percentage of the budget.

And so, I commend the president for putting Medicare and Social Security on the table. He is correct in doing that. You can't have serious deficit reduction program without dealing with those programs in the long term, in the out years.

BAIER: What do you say to the Democratic critics who say, you Republicans are not coming to the table with a lot of give?

MCCONNELL: We have 9.2 percent unemployment. Their prescription is to raise taxes? I mean, my goodness. Who thinks that -- the president didn't think that was a good idea in December. Why do they think it's a good idea now?

BAIER: Well, Senator, the words they are using "shared sacrifice," "balanced approach."

MCCONNELL: Those are nice words. But how do you get the economy growing, which is the biggest way to increase government revenue? You do get the economy growing by having a big tax increase. You get the economy growing by incentivizing the private sector.

Look, if you are in the private sector right now and you're trying to decide whether to expand, what do you see the government doing? Proposing to raise taxes, borrowing, spending, over- regulating. It's not a very reassuring message if you're running a business, if you look at the federal government.

BAIER: Treasury Secretary Tim Geithner is saying this morning that the White House is still going to try to get the biggest deal possible. What is the biggest deal possible?

MCCONNELL: Well, I don't know, but I'm for the biggest deal possible, too, it's just that we're not going to raise taxes in the middle of this horrible economic situation.

BAIER: Would you agree to raise the debt ceiling with promises for big structural changes to the tax code down the road? In other words, is there a mechanism that could tie a current deal to some future promise of a deal?

MCCONNELL: Well, we can't negotiate it here. But let me just say this -- we believe that tax reform is long overdue. And the president believes that as well -- try to get the rates down, take a lot of the preferences out. It's very, very difficult to do that a week. It's an extremely complicated process.

But we are in favor of that, and we think we ought to get about it, but I don't see how you can do in the context of our immediate challenge here, which is to figure what to do in response to the president's request of us to raise the debt ceiling. BAIER: Well, the House Republicans put forward their own debt limit proposal, do you believe?

MCCONNELL: Well, I think we're going to continue to hope here that we can work out something with the administration. Obviously, the other side, the other political side controls most of the government. They have the Senate. They have the presidency. You can't get an accomplishment without some bipartisan agreement. And that's part of what the meeting tonight is about and we hope it will be successful.