The Statue of Liberty reopened Sunday after New York state agreed to pay for running the site during the federal shutdown. Associated Press
WASHINGTON—Senate leaders attempting to avoid a U.S. debt default remained at loggerheads Sunday and escalated the standoff by reopening the contentious issue of automatic spending cuts, damping hopes that some of Congress's most canny negotiators would break the impasse.
As the search for a way to end the partial federal shutdown and avoid a debt crisis shifted to the Senate, Democrats made plain that one of their top priorities was to diminish the next round of across-the-board spending cuts, known as the sequester, due to take effect early next year.
Many Republicans, including Senate Minority Leader Mitch McConnell (R., Ky.), oppose retreating from those cuts. That set up a clash that seemed almost as intense as the one that caused budget talks between House Republicans and President Barack Obama to collapse Friday.
"Total federal spending has now gone down for two years in a row—the first time that's happened since the Korean War,'' Mr. McConnell said Sunday. With the additional sequestration cuts on tap for 2014, the budget limits have produced "the most significant spending reduction in modern history and Senate Republicans will not accept anything that undoes these cuts."

Budget Battle

The talks took place amid high public frustration and increasing market wariness. The Treasury says that on Thursday it will be left with $30 billion in cash to pay the government's bills, an amount that could run out in a week or two. Lawmakers are trying to reach agreement to raise the nation's statutory borrowing limit—the debt ceiling—and end the partial shutdown that began Oct. 1.
The talks also showed Senate Democrats moving aggressively to press their top priorities in a pact that would be presented to the Republican-controlled House at a moment when voting it down could put the nation closer to potential default.
Senate Democrats have been strengthened by the sidelining, at least for now, of House conservatives, who dropped nearly all their major policy demands only to see Mr. Obama reject their proposal for ending the stalemate.
With Senate leaders now negotiating, the fiscal battle focused for the first time in weeks on the budget itself, not on side issues that had dominated, such as the Republican demand that the 2010 health-care law be delayed or altered. Republicans who had opposed the GOP's "defund Obamacare'' strategy welcomed the return of interest to basic spending issues.
"I think we have finally gotten to a really good place,'' said Sen. Bob Corker (R. Tenn.). "Now's the time for all of us to focus on the right page, the right paragraph to get this done.''
But the focus on spending brought the parties back to the impasse that has divided them for months: Whether or not they can agree to a broad deficit-reduction deal to replace the scheduled across-the-board spending cuts.
Mr. McConnell and Senate Majority Leader Harry Reid (D., Nev.) conferred by phone Sunday, people familiar with the talks said, after meeting Saturday for their first face-to-face negotiations since the government shutdown began.
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Federal workers protested the shutdown on Sunday near the Capitol. Reuters
Mr. Reid struck an upbeat note on Sunday, but gave no indication that either side had budged from its core demands.
"Our discussions were substantive,'' he said. "I'm optimistic about the prospects for a positive conclusion.''
Lawmakers said they would watch Monday's opening of financial markets to see whether investors, already jittery, show greater concern. That, in turn, could affect the climate for further negotiations.
Sen. Dick Durbin (D., Ill.) said that investors may have been assuming Congress would devise an 11th-hour compromise, rescuing the economy like a damsel being plucked from the tracks before an oncoming train. "As we start hearing the train whistle, I think that there may be a different view,'' Mr. Durbin said.
Many senators had thought the outlines of a deal were coming together in a bill drafted by Sen. Susan Collins (R., Maine), which would have funded the government until mid-March and raised the debt limit through January. The plan also included changes to the health-care law, delaying a tax on medical devices designed to help fund the law and tightening enforcement of income-eligibility rules for people receiving government subsidies for insurance. Those changes were far more modest than Republicans demanded earlier.
Mr. Reid rejected the plan, in part because he didn't want the fiscal measures to include concessions on the health law. But Democrats say their biggest objection was that it would make it more difficult to reach their long-held goal: to replace some of the across-the-board sequester cuts with a broader budget deal that would include tax-revenue increases and cuts in entitlement programs.
Mr. McConnell on Sunday upbraided Mr. Reid for rejecting the Collins proposal, saying, "It's time for Democrat leaders to take 'yes' for an answer.'' After Mr. McConnell suggested the Collins plan had drawn significant Democratic support, the six Democrats who has been working with Ms. Collins on her proposal issued a statement declaring that they hadn't yet signed on.
"We do not support the proposal in its current form,'' the six senators said. "There are negotiations, but there is no agreement."
In another sign of Democrats' efforts to forge party unity at a delicate stage of negotiations, White House officials said Mr. Obama on Sunday called House Democratic Leader Nancy Pelosi (D., Calif.) to review budget strategy, as he did in an Oval Office meeting with Senate Democratic leaders Saturday.
Mr. Corker warned that Democrats may be overreaching by trying to revise the sequester cuts set by the Budget Control Act of 2011, and he urged the party to stick to the most urgent fiscal issues.
"There's no question that House Republicans overreached in trying to use this negotiation to repeal a [health care] bill that was very central to the president's agenda,'' said Mr. Corker. "The same thing is happening on the Democratic side among Senate leadership as pushed by the White House. They're trying to now undo a law put in place in 2011, the Budget Control Act.''
Sen. Charles Schumer (D., N.Y.) suggested that lawmakers could pass a short-term funding bill with a path for resolving the parties' differences over the sequester cuts.
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Sen. Charles Schumer (D., N.Y.), left, and Senate Majority Leader Harry Reid address reporters at a news conference at the U.S. Capitol on Saturday.Reuters
"So, how do you overcome that dilemma? We're not going to overcome it in the next day or two," Mr. Schumer said on CBS. "But if we were to open up the government for a period of time that concluded before the [next] sequester took place, which is Jan. 15, we could have a whole bunch of discussions, and I am more optimistic than most."
That pointed to a possible compromise that sources familiar with Senate budget talks said that Mr. Reid floated to Mr. McConnell on Sunday: Continue spending at current levels until mid-December, set up a mechanism for negotiating over the across-the-board cuts and other budget matters for the rest of the year, and extend the debt limit for about six months. It wasn't immediately clear what Mr. McConnell's response was.
Mr. Reid disputed the suggestion that Democrats were proposing to breach established spending caps, noting they had passed a bill that would extend current funding levels through Nov. 15. Beyond that, Democrats are hoping to find deficit-reduction savings in other areas to replace future sequester cuts