By Richard Cowan and Rachelle Younglai
WASHINGTON (Reuters) - Republicans in the House of Representatives set in motion on Wednesday a plan that ultimately could avert a federal government shutdown on October 1, turning a later battle over the debt ceiling into the main event in the conservative struggle against President Barack Obama's healthcare program.
Obama accused Republicans of engaging in extortion by demanding a delay in "Obamacare" as the price of avoiding default that, were it to happen, would smash the U.S. economy.
"You have never seen in the history of the United States the debt ceiling or the threat of not raising the debt ceiling being used to extort a President or a governing party," Obama told a group of business leaders.
Undaunted, Republicans said Wednesday they would add other demands to their list, including approval of the Keystone oil pipeline.
The action on the two separate measures, to continue funding the government and increase the government's borrowing authority by raising the debt ceiling, may begin as early as this week in the House, starting with the funding measure on Thursday or Friday.
The debt ceiling, which could come up next week, is far more consequential because it could rattle world markets and lead to a downgrade of the government's credit rating or to default. Without Congress' approval, the government will be unable to borrow money to pay its debts sometime in mid-October, according to the Treasury Department.
"A government shutdown, and perhaps even more so a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy," Fed chairman Ben Bernanke warned at a news conference.
In an ominous move, Republicans said they will include in their temporary spending plan a provision they claim will prevent a debt default if Congress does not raise the debt limit on time.
According to lawmakers, the provision is based on a bill that passed the House in May that allows the government to borrow money to pay bondholders and retirees if the Washington hits the debt limit. Most government programs would not be able to continuing operating, however, under such a scenario.
The idea of directing the U.S. Treasury to prioritize payments is considered unworkable by the Obama administration. But it allows Republicans to claim that they did their best to avoid default.
The usual uncertainty surrounding such showdowns is compounded this time for both Republicans and Democrats.
Republicans are deeply divided over their tactical approach, with House Speaker John Boehner unable to control his members and increasingly portrayed by Tea Party activists as an enemy for trying to avoid linking the fiscal showdowns to the health care law. Boehner and other members of the House leadership tried unsuccessfully to avoid tying the funding and debt ceiling measures to Obamacare.
At the same time, Obama's relationship with Democrats in Congress is more frayed following recent disagreements over Syria and Obama's choice to head the Federal Reserve.
But for the moment, the carefully scripted legislative dance announced by Boehner Wednesday and racing against the October 1 end of the 2013 fiscal year, should go like this:
A bill to fund the government temporarily, and thus avoid a shutdown, may move through the Republican-controlled House this week. Boehner is trying to round up the votes among his fellow Republicans to pass a funding bill that will last through December 15. It would keep in place tough spending caps imposed by the across-the-board cuts known as the "sequester."
Boehner's task will be aided by language embedded in the bill and demanded by conservatives that would deny money to implement Obama's healthcare law, known as Obamacare, which next month begins signing up uninsured people for subsidized insurance.
The Democratic-held Senate is expected to take the House-passed bill, strip out the troublesome Obamacare provision and then send it back to the House for final passage.
To do this, Senate Majority Leader Harry Reid will have to find at least six Republicans to cooperate with the overall plan. Though they are in lock-step opposition to Obamacare, some Senate Republicans consider it futile and politically suicidal to link efforts to kill it to the government funding or debt-ceiling measures.
If Reid succeeds, and if the right combination of House Republicans and Democrats join forces to pass the retooled Senate bill, Congress will have side-stepped government shutdowns like the ones that roiled Washington in late 1995 and early 1996.
Then, House Republicans will queue up the second battle over raising the $16.7 trillion limit on government borrowing - knowing the Treasury has said it will run out of ways to pay U.S. bills around mid-October. Past battles over the debt ceiling have rattled markets far more than threats of government shutdowns.
Again, Republicans aim to attach to the debt measure a provision to delay or kill Obamacare, along with other contentious ideas, such as approving the Keystone oil pipeline that would run from Canada through the middle of the United States to the Gulf of Mexico. The Obama administration is weighing environmental concerns over that long-delayed project.
Both steps are drawing heavy opposition from Democrats.
At a brief news conference following a closed-door meeting of House Republicans, Boehner warned that this 2013 fight over the debt limit would be "no different" from his party's efforts in 2011 to link a debt limit hike to deficit-reduction efforts.
That 2011 battle brought so much uncertainty over the U.S. government's ability to manage its fiscal affairs that it resulted in the first-ever downgrade of Washington's gold-standard credit rating and a months-long swoon in the stock market.
Obama, meeting with CEOs at the Business Roundtable, expressed his weariness over yet another set of battles on spending and borrowing.
He urged the business leaders to "make sure that you are using your influence in whatever way you can" to put a stop to the legislative upheavals over the debt limit and government funding.
BLAMING EACH OTHER
House Republicans, who bridle at the notion that they are the ones threatening a government shutdown and default, worked hard on Wednesday to argue to voters that they are not the ones to blame.
"The president is shutting down the government because he wants to protect his pet project (Obamacare)," first-term Republican Representative Luke Messer told Reuters.
Meanwhile, Democrats in Congress reminded reporters of the financial market gyrations witnessed during the last big spending and debt fight in mid-2011.
Senator Charles Schumer, the third-ranking Democrat in the Senate, said the "extreme right wing" of the Republican Party was threatening a re-run of 2011. "We're closer to a default than we've ever been before," Schumer argued, saying Republican conservatives are more entrenched now.
Republican lawmakers and some congressional aides downplayed the notion that Obama's recent legislative scrapes have emboldened them to take a hard line in this autumn's fights over spending levels and allowing more government borrowing.
Instead, they cited a mix of other reasons, including the unpopularity of Obamacare in their home districts and the pressure of conservative lobbying groups such as the Club for Growth, who are pushing for the showdowns.
(Additional reporting by David Lawder and Thomas Ferraro; Editing by Fred Barbash, Vicki Allen and Philip Barbara)