US fiscal cliff: Obama cuts short holiday to reach deal

US President Barack Obama. Photo: 23 December 2012 President Obama is expected to meet Republican leaders to try to find a compromise

US President Barack Obama has cut short his holidays in Hawaii and is flying to Washington to try to reach a deal to avoid the so-called fiscal cliff.

Unless a compromise is found, tax increases and huge spending cuts come into force on 1 January, threatening to tip the US back into recession.

However, Democrats and Republicans are still at loggerheads over the issue.

Meanwhile, the US Treasury has announced measures to prevent it hitting a legal limit on its borrowing.

Default warning

In an open letter to the Democrat US Senate majority leader Harry Reid, Treasury Secretary Timothy Geithner said the Treasury would enact a series of extraordinary accounting measures to free up about $200bn from the government's official borrowing figure.

He said that the measures should prevent the government from reaching the $16.4tn "debt ceiling" - the legal limit set by Congress on how much the US government can borrow - for about another two months beyond 31 December.

The measures include:

  • halting certain financial assistance provided by the federal government to state and local governments
  • temporarily halting investments in new government debts by state retirement funds for civil servants and postal workers, and by an emergency fund that the government can draw on to defend the value of the dollar

Mr Geithner warned that without them, the government would run out of cash on Monday and "the United States would otherwise default on its legal obligations".

Start Quote

Chris Bates, general manager of Cataloochee Ski Area

"I had about a $600,000 capital budget planned for next year. A lot of that would go away if this is allowed to happen”

End Quote Chris Bates Cataloochee Ski Area, North Carolina

Legislation passed by Congress sets out how much the US government spends on the likes of social security and defence, whilst also legally defining how much the government can raise in taxes.

By imposing a third legal limit - the debt ceiling - the government faces a potentially impossible situation in which it must either disregard the debt ceiling, raise taxes without legal authority, or else default on some of its spending obligations.

The last time that the US government ran up against the debt ceiling, in the summer of 2011, President Obama negotiated a last-minute increase with the Republican-controlled Congress, from $14.3tn to the current $16.4tn limit.

That deal effectively created the phenomenon known as the fiscal cliff - $600bn in automatic tax rises and spending cuts due to come into force on 1 January 2013.

Republicans and Democrats agreed to these draconian measures to slash the government's rate of overspending - its deficit - as a fall-back position, on the assumption that a more sensible agreement on how to cut the deficit would be reached in the meantime.

'Silent corridors'

What is the fiscal cliff?

  • On 1 January 2013, tax increases and huge spending cuts are due to come into force - the so-called fiscal cliff
  • Deadline was put in place in 2011 to force president and Congress to agree ways to save money over the next 10 years
  • Fear is that raising taxes while massively cutting spending will have huge impact on households and businesses
  • Experts believe it could push the US into recession, and have a global impact on growth

Mr Obama is expected to meet Republican leaders again to try to negotiate a solution, although no new date has been announced.

Republicans oppose cuts to defence spending as well as the expiration of income tax cuts on the highest earners, which date from George W Bush's presidency.

Democrats want to maintain financial support for lower-income families - including a payroll tax cut and extended unemployment benefits - and oppose cuts to entitlements such as Medicare and social security.

Both sides are keen to avoid taking the blame for the sudden contraction in the government's rate of overspending that would result if no deal is reached.

Failure to do so could damage the US and global markets, and threatens to send the US economy into recession.

Brinkmanship over the 2011 debt ceiling negotiations prompted the rating agency Standard & Poor's to strip the US of its top-ranking AAA credit rating.

The two sides remain far apart, but analysts say a short-term deal may be agreed that will postpone the cuts until spring.

On Wednesday, the Republican House of Representatives Speaker John Boehner called on the Democrat-led Senate to come up with legislation on how it would avoid the cliff, and pass it to the House for consideration.

However, a senior administration official said it was up to Republican leaders not to stand in the way of an agreement.

Despite this, there is little sense of urgency in the capital - the corridors of Congress are silent, the BBC's Zoe Conway in Washington reports.

Changing taxation across the years

Tax year 1993-2000 2001 2002 2003-2008 2009-2012 2012 tax brackets 2013 scenarios
Tax cuts expire Tax cuts expire for top incomes

Source: Tax Foundation, IRS

Tax brackets shown for unmarried individuals

President

Bill Clinton

Bill Clinton

George Bush

George W Bush

Barack Obama

Barack Obama

Bottom rate

15%

10%

10%

10%

10%

Up to

$8,700

15%

10%

15%

15%

15%

15%

$8,700-

$35,350

15%

28%

27.5%

27%

25%

25%

$35,350-

$85,650

28%

25%

31%

30.5%

30%

28%

28%

$85,650- $178,650

31%

28%

36%

35.5%

35%

33%

33%

$178,650-$388,350

36%

33% or 36%*

Top rate

39.6%

39.1%

38.6%

35%

35%

Over

$388,350

39.6%

39.6%

*President Obama has previously called for the tax cut to expire for those earning over $250,000

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