US Senate leader Harry Reid voices fiscal cliff fear

Mitch McConnell said Republicans would not "write a blank cheque" to Democrats to avert the fiscal cliff

The US appears to be heading over the "fiscal cliff", with prospects dim for a deal to avoid tax rises and spending cuts, the Senate majority leader says.

Speaking on the Senate floor, Democrat Harry Reid said there did not seem to be enough time to craft a deal before Monday night's end-of-year deadline.

The president and Senate are back at work, with the House called back for Sunday - one day before the deadline.

Analysts say heading over the "cliff" could tip the US into recession.

President Barack Obama is reported to have spoken to congressional leaders by phone on Wednesday for an update on the progress of talks.

House Majority Leader Eric Cantor said the House might remain in session from Sunday evening until 2 January, but gave no details of planned votes.

The new 113th Congress, reflecting the results of November's elections, is scheduled to convene on 3 January.

Bickering over the cliff has divided Washington in recent weeks, with President Obama and House Speaker John Boehner unable to reach a deal before Christmas.

The president wants to ensure that taxes do not rise for Americans earning under $400,000 (£250,000), and insists on raising new tax revenue in any deal.

'Dictatorship of the speaker'

"It looks like that's where we're headed," Harry Reid said of the so-called fiscal cliff

But many Republicans oppose new taxes, and an alternative plan proposed by Mr Boehner - which would have seen taxes rise only on those earning over $1m - failed in the House late last week.

Republicans left Washington for Christmas and said responsibility for avoiding the cliff rested with the Democratic-led Senate.

But in the Senate chamber on Thursday Mr Reid said the requirement to get at least 60 of 100 votes to move to a vote on any legislation almost certainly doomed any new plan unless Republicans gave it strong backing.

"It looks like that's where we're headed," Mr Reid said of the fiscal cliff.

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

The Senate leader said the House of Representatives was effectively "a dictatorship of the speaker", accusing Mr Boehner of holding up a vote on a Senate-passed bill to avoid the fiscal cliff.

"John Boehner seems to care more about keeping his speakership than about keeping the nation on sound financial footing," Mr Reid said. Mr Boehner faces an internal re-election contest among House Republicans on 3 January.

Later in the day, Republican Senate minority leader Mitch McConnell said that while Senate Republicans would consider any proposal sent to them by Democrats, they would not "write a blank cheque" to resolve the fiscal cliff.

But Mr McConnell, speaking on the floor of the Senate, seemed to express hope that there was still time to reach an "agreement of some kind".

'Extraordinary accounting'

The term fiscal cliff refers to the combination of almost $600bn (£370bn) of tax rises and spending cuts due to come into force on 1 January if Congress does not pass new legislation.

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

Sweeping tax cuts passed during the presidency of George W Bush will expire, eventually affecting people of all income levels, and many businesses.

Other tax cuts and benefits to expire include:

  • A 2010 payroll tax cut, the expiration of which would prompt immediate wage-packet cuts
  • Benefits for the long-term unemployed
  • Compensation for doctors treating patients on federal healthcare programmes
  • Inheritance taxes are also likely to be affected if no deal is reached.

In addition, spending cuts mandated by a law passed to break a previous fiscal impasse in Congress will come into force, affecting both military and domestic budgets.

The cuts are expected to affect federal government departments and the defence sector, as well as hitting unemployment insurance and veterans' support.

On Wednesday, Treasury Secretary Timothy Geithner warned Congress the Treasury would have to enact a series of extraordinary accounting measures to free up about $200bn from the government's official borrowing figure.

Those measures would stop the government from hitting its $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.

But 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".

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