By Andrew Duehren and Kate Davidson 

WASHINGTON -- The White House and House Speaker Nancy Pelosi continued talks Friday over how to pay for a two-year agreement to raise overall spending limits and at the same time raise the U.S. government's borrowing limit, aiming to finalize the agreement before the House leaves town next week.

Mrs. Pelosi earlier this past week said a deal needed to be reached by Friday to give the House enough time to pass the bill before the start of the House's August break, pressing negotiators to clear the last hurdles toward an agreement. But aides and lawmakers indicated there is flexibility to reach an agreement after Friday and still pass the agreement in time.

The Trump administration is seeking roughly $150 billion in cuts to offset any spending increases above limits set in a 2011 law. It proposed to House negotiators a broader list of $574 billion in potential cuts to various programs Thursday evening, according to a senior administration official. The administration has also suggested extending spending limits beyond their expiration after fiscal year 2021 to reduce spending by $516 billion, according to the official.

Those offers didn't appeal to Democrats, and a Democratic aide close to the talks said the proposed cuts were "the White House's starting point for negotiations on this aspect."

"They understand these levels are nonstarters for us. Talks will continue," the Democratic aide said.

A person familiar with the matter said the White House views the proposed offsets as a serious list and is waiting to see how Mrs. Pelosi responds.

President Trump expressed some optimism Friday about the negotiations.

"Hopefully we're in good shape on the debt ceiling," Mr. Trump told reporters in the Oval Office, before saying of the limit: "We can never play with it."

Democrats want equal increases in military and nonmilitary funding next year, a concept known as parity. Administration officials initially sought to freeze spending at current levels next year, but Senate Republicans balked at that proposal, warning it could harm the military. Some House Republicans, meanwhile, are calling for any new spending to be offset by cuts elsewhere.

The debt limit is a statute that prohibits the U.S. from borrowing money to close the gap between what the government spends and what it collects. Without the ability to borrow, the government could begin to miss payments on its obligations, such as Social Security and veterans benefits or interest on the debt, triggering a potential default.

Congress in recent years has been tying debt-limit increases to other fiscal legislation, which gives members of both parties a chance to extract from the other concessions on broader spending levels. This time, there is more urgency because Treasury Secretary Steven Mnuchin has warned the U.S. could hit its debt ceiling in early September, before lawmakers return to Washington.

Proposed measures to offset the cost of the agreement is the last major hurdle in the talks. Mr. Mnuchin said on Thursday that both sides had agreed on raising spending levels above the 2011 caps and raising the debt ceiling for two years.

Without a new agreement to lift spending limits, automatic spending cuts known as a sequester would reduce discretionary spending by 10% early next year.

Mr. Mnuchin and Mrs. Pelosi spoke on Friday for about 15 minutes, according to an aide to the speaker, and the pair are expected to continue talking.

The last spending agreement, which expires Oct. 1, raised spending by almost $300 billion above limits set in the 2011 law and included roughly $38 billion in cuts and small revenue increases to partially offset its cost.

While negotiators appear close to reaching a deal, any final agreement will need to earn the approval of Mr. Trump, whom lawmakers in both parties caution may not sign on to the agreement reached by members of his administration.

--Catherine Lucey contributed to this article.

Write to Andrew Duehren at andrew.duehren@wsj.com and Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

July 19, 2019 18:41 ET (22:41 GMT)