By Rachelle Younglai
WASHINGTON (Reuters) - Republicans in the House of Representatives passed a bill on Thursday that would require the Obama administration to prioritize government debt payments and retirement benefits if Congress fails to reach a deal to raise the U.S. debt ceiling.
The legislation is not expected to go anywhere in the Democratic-controlled Senate and the White House has said it will veto the bill, but what is essentially a tactical maneuver will allow the Republicans, who control the House, to argue they have done their best to avoid a potential U.S. credit default.
By the end of next week, the Obama administration will no longer be able to borrow money to fund government operations because Congress has only agreed to extend the government's borrowing authority until May 19.
This will force the U.S. Treasury to start using its limited accounting maneuvers to extend the debt limit but such measures are not permanent and analysts say they could be exhausted by October.
The Republican bill, which passed 221-207 with a few Republicans dissenting and no Democratic support, would allow the U.S. Treasury to borrow more funds to pay the interest and principal on government bonds as well as retirement benefits.
Democrats called it the "pay China first" legislation as the Asian country holds more than $1.2 trillion in U.S. government bonds and is America's largest foreign creditor.
The bill "says we should pay the government of China before we pay our troops, before we pay our veterans, before we pay other bills here in the United States," said Chris Van Hollen, the top Democrat on the House Budget Committee.
But Republicans argued that it would take the threat of default off the table.
"Financial markets ought to be confident that their Treasury bonds are safe, regardless of what political storms are raging in Washington," said Republican Representative Tom McClintock of California, who crafted the original version of the bill.
House Republicans are looking for ways to deal with the debt limit while staying true to House Speaker John Boehner's rule that any debt-cap increase be matched by budget cuts and reforms.
The Republicans have been trying to force the administration to slash government spending and reform Medicare and Social Security benefits in return for an increase in the debt ceiling.
However, with no deal along those lines in sight, some allies of chief Republican tax writer Dave Camp, a representative from Michigan, have floated the idea of linking a debt-limit increase to a revamp of the tax code and lower tax rates.
This would allow lawmakers to skirt the politically painful decisions to cut Medicare and Social Security.
However, it is unclear if mainstream party supporters, much less the conservative faction of the Republican Party, will go along with this.
"It wouldn't be enough," said Kevin Brady, a senior Republican from Texas who is on Camp's tax-writing committee.
He said reform of the Social Security and Medicare benefits programs still would be required.
Camp has been working for more than a year to draft an overhaul of the entire tax code and has vowed repeatedly to move legislation out of his Ways and Means Committee this year.
House Republican are due to hold a meeting next Wednesday to discuss the various options.
(Additional reporting by Kim Dixon; Editing by David Brunnstrom and Bill Trott)
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