* White House calls House bill "political gamesmanship"
* Debt limit issue comes to a head late July or later
* Prioritization seen threatening U.S. credit rating
By Mark Felsenthal
WASHINGTON, May 7 (Reuters) - The White House said on Tuesday the president would veto legislation that would prioritize U.S. debt payments if the nation hits its borrowing limit, sending an early salvo in the next round of federal budget skirmishes.
The nation's debt ceiling has been a centerpiece of budget fights between President Barack Obama and congressional Republicans for several years and brought the nation to the brink of defaulting on its debt in the summer of 2011.
While there has been a lull in the dispute, matters are expected to soon fester again when the administration begins running out of ways to raise money to pay U.S. government obligations.
On May 19, the borrowing limit's temporary suspension voted by Congress in March comes to an end. Then, a new debt ceiling lawmakers approved would go into effect at the level necessary to pay U.S. debt up to that point.
That new cap is anticipated to be about $16.9 trillion, up from the current level of $16.4 trillion.
With U.S. debt immediately meeting the new ceiling, the Treasury will then juggle its funds to meet federal financial obligations through at least the end of July, according to the Bipartisan Policy Center.
In the interim, some Republicans would like to use the borrowing cap to extract fiscal concessions from the president, either in the form of spending cuts or tax cuts.
To pressure the administration, the Republican-controlled House of Representatives is considering legislation that would allow lawmakers to put off raising the debt ceiling by requiring the U.S. Treasury to pay public bondholders and beneficiaries of government programs if Congress doesn't raise the cap.
The measure would almost certainly fail to pass the Democrat-led Senate and is therefore unlikely to become law. But it shows that Republicans aim to use the debt issue for leverage.
The White House Office of Management and Budget said in a statement that the administration "strongly opposes" the debt payment prioritization measure, which it described as "political gamesmanship" and said would result in Congress refusing to pay obligations it has already agreed to.
VOW TO VETO
"This bill would threaten the full faith and credit of the United States, cost American jobs, hurt businesses of all sizes, and do damage to the economy," OMB said in a statement. "If the president is presented with legislation that would result in the Congress choosing to default on the full faith and credit of the United States, he would veto it."
The president this year has refused to negotiate with Congress over raising the debt ceiling, saying that a U.S. debt default should be unthinkable to either political party.
At the last face-off between the White House and Republicans over budget issues in February, Republicans stood firm on letting across-the-board spending cuts go into effect March 1 despite dire warnings from the administration the cuts would damage the economy.
But Republicans backed away from making an issue of the debt ceiling at that time and voted to allow it to be suspended until this month.
As a policy matter, Republicans are focused on debt and deficit reduction and shrinking the size of government. Democrats' primary focus is on strengthening economic growth and job creation - which is helped by federal spending. They therefore advocate a more gradual approach to deficit reduction.
After the deepest recession since the Great Depression and wars in Afghanistan and Iraq, the debt held by the public as a percentage of the nation's output has soared from 35.5 percent in 2007 to 71.3 percent in 2012. During that time, Congress has raised debt limit from $9.8 trillion to its current $16.4 trillion.
Republicans have said the need to raise the nation's borrowing cap should be an opportunity to discuss reining in spending or tax reform.
"Every single one of the half-dozen proposals that have actually worked to reduce spending in Congress over the last three decades have come out of this same process," Senate Budget Committee member Rob Portman, a Republican, said Tuesday at a conference sponsored by the Peter G. Peterson Foundation.
"Why? Because the American people do not like to extend the debt limit," he said.