'No middle' in DC anymore: Former Obama advisor

Washington's core problem is there is no 'middle': Orszag
Washington's core problem is there is no 'middle': Orszag

Former Obama budget chief Peter Orszag told CNBC on Thursday he would rather see a government shutdown than risk a default on the nation's debt.

"They're not even kind of in the same league," he said in a "Squawk Box" interview. "Let it all out and be done with it, before we get to the debt limit."

The Treasury said the nation would exhaust its borrowing capacity no later than Oct. 17. Since May, the government has been bumping up against its $16.7 trillion debt ceiling.

(Read more: Sec. Lew: Cash will run out no later than Oct. 17)

To avoid a government shutdown, President Barack Obama and Republican leaders also need to agree on at least a continuing resolution to fund operations beyond at end of the month.

"If we're going to go over the ledge, I would much rather go over the ledge with the spending bill than the debt limit," said Orszag, who was director of the Office of Management and Budget and is now vice chairman of global banking at Citigroup.

The House is expected to approve a measure this week, allowing the Treasury to borrow freely for another year, although that legislation would also include an anti-Obamacare provision.

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"The core problem here is for the past several decades the political system has been polarizing. At this point, there is no middle in the Congress," Orszag said. "And that's not going away."

While no final decisions have been made, party officials told The Associated Press that a one-year Obamacare delay was likely to be added, rather than the full-fledged defunding that's part of the spending bill awaiting action in the Senate.

"If we can get past this and not cause further harm, we've actually got a decent looking 2014," Orszag added, because the "big constraint on growth for the past three or four years was private sector deleveraging, [and] state and local fiscal consolidation," which are basically done.

—By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC. Wire services contributed to this report.