Battle Brewing Over Federal Debt Limit

As a new and politically divided Congress prepares to convene Wednesday, the newly muscular Republicans and the White House seem to be on a collision course over whether to raise the federal debt ceiling.

Some Republican lawmakers have vowed not to vote to raise the debt limit unless there is a plan in place for dealing with long-term obligations, including Social Security, and for returning to 2008 spending levels.

But the White House says that refusing to raise the limit would have a "catastrophic" impact on the economy.

"That would be a worse financial economic crisis than anything we saw in 2008," White House economist Austan Goolsbee said.

A critical showdown could come as early as March with the debt ceiling at $14.3 trillion, and the debt at nearly $13.9 trillion and growing daily.

The tax cut package that President Obama and Republican leaders negotiated at the end of last year pushed the government about three weeks closer to the debt limit, an official told Fox Business.

Republicans have vowed to shrink government and ease federal oversight of the private sector as part of their solution to heal a damaged economy. They have pledged to vote on bills that cut spending at least once a week.

The first spending cut vote is set for Thursday, a 5 percent reduction in the amount ticketed for lawmakers' and committees' offices as well as leadership staff. Aides estimated the savings at $35 million over the next nine months.

But Social Security, Medicare and defense spending account for a lion's share of the federal budget.

Incoming Majority Leader Eric Cantor of Virginia left the door open to potential defense cuts in a remarkable change of policy.

"Everything is going to be on the table," Cantor said.

In the Pledge with America, Republicans called for across-the-board cuts in nondiscretionary spending. But they said that defense and homeland security funding would not be touched.

Obama has expressed confidence that he will be able to work with Republicans who will control the House and an additional five seats in the Senate.

"I'm pretty confident that they're going to recognize that our job is to govern and make sure that we are delivering jobs for the American people and that we are creating a competitive economy for the 21st century," Obama said on Tuesday on his return flight from a two-week holiday in Hawaii.