US 'heading over fiscal cliff'
President Barack Obama was cutting short his holiday and returning to Washington today as a senior Democrat warned that the US appeared to be heading over the year-end “fiscal cliff” of higher taxes and deep spending cuts that could spin the still-fragile economy back into a recession.
The treasury secretary warned that the government would hit its borrowing limit on Monday, the final day of the year.
Mr Obama made phone calls to congressional leaders before leaving his Hawaiian holiday for Washington, the White House said.
The US appears to be headed over the fiscal cliff, warned Senate Democratic Leader Harry Reid who criticised his counterpart in the House of Representatives, Speaker John Boehner, for not calling House members back to work: “They are not here.”
He said Mr Boehner cared more about keeping his position when the new Congress comes in on January 3.
Consumer confidence fell to its lowest monthly level since August, largely on concerns over the fiscal cliff, the Conference Board reported. Stocks were falling on Wall Street at midday.
Treasury Secretary Timothy Geithner told Congress yesterday he would take “extraordinary measures as authorised by law” to postpone a government default. But he said uncertainty over the outcome of the fiscal cliff negotiations made it difficult to determine how much time those measures would buy.
Congress was not expected to return until tomorrow. In recent days, Mr Obama’s aides have been consulting with Mr Reid’s office, but Republicans have not been part of the discussions, suggesting that much still needs to be done before Congress can pass a deal, even a small one, by Monday.
At stake are tax cuts that expire on December 31 and revert to the higher rates in place during the administration of President Bill Clinton in the 1990s. That means $536bn (€406bn) in tax increases that would affect nearly all Americans. In addition, the military and other federal departments would have to cut $110bn (€83bn) in spending.
The changes are part of a long-delayed need for the government to address its chronic deficit spending.
While economists have warned about the impact of such a massive and abrupt shift, both the Mr Obama administration and Congress appear to be proceeding as if they have more than just four days left.
Congress could still act in January in time to retroactively counter the effect on most taxpayers and government agencies, but chances for a large deficit reduction package would likely be put off.
Mr Geithner’s news on the government about to hit its $16.4trn (€12.4trn) borrowing limit has brought more pressure to the process. Mr Obama wants an increase in the borrowing limit as part of any agreement to avoid the fiscal cliff, but Republicans want concessions in return.
Only Congress can raise the limit on the amount of debt the US can accumulate. In August 2011, the rating agency Standard & Poor’s stripped the government of its prized AAA bond rating because it feared that America’s dysfunctional political system couldn’t deliver credible plans to reduce the federal government’s debt and meet its debt obligations.
The House has passed a Republican plan to avert the fiscal cliff, and the Senate has passed a Democratic version. Their deficit-reduction projections differ by hundreds of billions of dollars over 10 years. Many Washington insiders say the gap could be bridged if partisan positions were not so firmly entrenched.
A major challenge in the fiscal cliff negotiations is taxes. Mr Obama has wanted the current tax cuts to stay in place for most Americans while letting taxes go higher for the wealthiest ones.
House Republican leaders have urged the Democratic-controlled Senate to consider or amend a House-passed bill that extends all existing tax rates. “The Senate first must act,” they said.
But MR Reid’s office insisted that the Republican-controlled House act on Senate legislation passed in July that would raise tax rates only on incomes above $200,000 (€151,000) for individuals and $250,000 (€189,000) for couples.
Meanwhile, Mr Obama has been pushing for a variant of that Senate bill that would include an extension of jobless aid and some spending reductions to prevent the steeper, broader spending cuts from kicking in.
Even if the Senate acts, Mr Boehner would have to let the bill get to the House floor for a vote. The chances of accomplishing that by December 31 were slim.
Amid the stand-off, Mr Geithner advised Congress that the administration will begin taking action to prevent the government from hitting its borrowing limit. In a letter to congressional leaders, he said accounting measures could save approximately $200bn (€151bn).
That could keep the government from reaching the debt limit for about two months. But if Congress and the White House don’t agree on how to avoid the “fiscal cliff,” Mr Geithner said, the amount of time before the government hits its borrowing limit is more uncertain.
Whenever the debt ceiling hits, however, it is likely to set up yet another deadline for one more budget fight between the White House and congressional Republicans.