Fiscal Cliff

Congress, White House start 7-week quest to avoid fiscal cliff

Democrats fight Republicans to raise taxes on rich - just like White House race all over again

PUBLISHED : Wednesday, 14 November, 2012, 12:00am
UPDATED : Wednesday, 14 November, 2012, 3:52am

Amid global stock-market jitters over Washington's political brinkmanship, United States lawmakers return to the capital this week with a seven-week deadline to prevent the nation careering over a so-called fiscal cliff into another recession.

The post-election battle over scheduled tax rises and budget cuts is shaping up as an extension of the presidential election campaign - with Democrats trying to rally support for raising taxes on the wealthy, and Republicans countering that such an approach would devastate the "job creators".

Both sides generally agree on the need to avoid the US$600 billion (HK$4.6 trillion) in draconian deficit-reduction measures they all agreed to in August 2011, which come into effect on January 1 in the absence of a budget deal. They also agree on a need for long-term deficit reduction and revisions of the tax code.

They are at odds over whether to extend tax cuts for everyone, as Republicans want, or just for those earning below US$250,000, as President Barack Obama, fresh from winning reelection, wants. The Republicans believe the extra revenue needed to rein in budget cuts could be gained through reforms rather than from the rich.

The president and the Republicans who control the House of Representatives have sounded conciliatory notes since the election on reaching a deal. But it was clear on Monday that the two sides were still far apart.

In a commentary that raised eyebrows in Washington, Glenn Hubbard, who was the chief economic adviser to Republican presidential candidate Mitt Romney, urged Republicans to accept an increase in average tax rates on upper-income payers as part of a long-term deficit solution.

While the budget cuts and tax hikes are not formally linked, they have become intertwined politically because of timing: both take effect at the beginning of 2013.

Washington is awash in petitions, letters of concern, editorial recommendations and expensive lobbying efforts, particularly by the defence and healthcare industries, which stand to lose billions of dollars unless the fiscal cliff can be avoided.

Universities and city mayors are also joining the clamour not to have their federal funds cut.

Yesterday, a group of 350 economists, organised by a largely liberal group called Campaign for America's Future, issued a statement urging both sides to cease their "obsessive concern with cutting deficits" amid a "fragile" economic recovery.

The widespread sentiment of market analysts was reflected in a memo by strategists at one of America's biggest banks, PNC, which stated that while the elections "brought some clarity" to the cliff situation, "significant uncertainty remains in the outlook regarding timing and composition of a fiscal cliff deal.

"The longer it takes the president and Congress to negotiate a deal, the higher the odds that the US fiscal situation will unhinge the progress made during the past three years of economic recovery."