UPDATE 2-US House Republicans readying debt ceiling 'term sheet' conditions

(Recasts with fresh quotes, details and background)

By David Morgan and Richard Cowan

WASHINGTON, March 23 (Reuters) - U.S. House Republicans are working on a "term sheet" of conditions they would want Democrats to agree to before voting to raise the government's $31.4 trillion debt ceiling, which would be necessary to avert a historic default that could shake the economy.

House Budget Committee Chairman Jodey Arrington said on Thursday that Republicans are closing in on a "package of reforms" including spending cuts that could pass the House of Representatives with bipartisan support and win the signature of President Joe Biden.

"If we're going to negotiate, we're going to have to have something on paper that gets the support of at least 218 of our members," said Arrington, whose party controls the House by a narrow 222-213 margin.

Biden maintains that Democrats will not negotiate on the debt ceiling, which needs to be raised to cover spending and tax cuts previously authorized by Congress. But no hike can happen without the support of Republicans who say they will not approve an increase without an agreement on spending cuts.

The nonpartisan Congressional Budget Office

last month

forecast that the federal government could default sometime between July and September without a deal. The recent collapse of a pair of U.S. banks have also raised the stakes of further economic uncertainty.

Arrington told reporters that completing the debt ceiling document is now a higher priority for Republicans than presenting a budget, adding that the effort led by Republican House Speaker Kevin McCarthy is "on track to have something on paper, in writing" that the conference can move forward on.

McCarthy's office was not immediately available for comment.

More than seven weeks after Biden and McCarthy held their first and only meeting at the White House, Republican lawmakers have shown increasing frustration over the president's insistence that Congress raise the federal borrowing limit before spending discussions begin.

An outside budget expert called the move toward a Republican debt ceiling term sheet a positive development.

"It's encouraging," said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget.

"What we need is a reasonable resolution to this fiscal standoff," she added. "There are many reasonable places to land, but discussions need to get underway in earnest as quickly as possible."

The Democratic staff of Congress' Joint Economic Committee issued a report on Thursday analyzing the impact on everyday Americans, if the government even comes close to defaulting.

Workers would lose an average of $20,000 from retirement savings and new home buyers would pay an extra $55,000 over the course of a mortgage, they warned.

"Before you even get to default, if we see interest rates rise the way that we saw them rise in 2011, these are the real world impacts on average Americans," said Senator Martin Heinrich, the committee's senior Democrat.

In 2011, Republicans also demanded steep budget cuts in return for a debt limit increase. A stalemate ensued and in August 2011, the Standard & Poor's credit rating agency stripped the world's largest economy of its top-notch AAA status.

But Arrington insisted that the U.S. government would not default, suggesting that the Republican debt ceiling terms would include debt prioritization that would allow the Treasury to continue to make payments on the debt, Social Security and Medicare and benefits for veterans and activity duty military personal.

"You already have the prioritization of payments. So that's one. We now know that creditors are going to be paid. Our seniors are going to be paid. Our sailors and soldiers will be paid. And we're not going to default," Arrington said.

Treasury Secretary Janet Yellen earlier this month

warned

that the prioritization strategy would not avert default.

"Prioritization is simply not paying all of the government's bills when they come due," she told the House Ways and Means Committee on March 10. "That really is just default by another name." (Reporting by Richard Cowan and David Morgan; Editing by Scott Malone and Marguerita Choy)