The fiscal cliff involves US$600 billion in automatic tax hikes and spending cuts effective in early 2013 if US lawmakers fail to agree on reducing the budget deficit.
Obama cuts Hawaii holiday short over fiscal cliff
US President heads back to Washington in last-ditch attempt to stitch up a deal with Congress on tax rises and spending cuts
US President Barack Obama has cut his Christmas vacation short to return to Washington to make a last-ditch push for a compromise on a tax and spending dispute with Congress that remains stubbornly unresolved.
Without action by Obama and Congress, automatic budget cuts and tax increases are set to begin in January, which many economists say could send the country back into recession.
So far, the president and congressional Republicans have been unable to reach an agreement on any alternatives.
The so-called fiscal cliff is the result of a poison pill agreement reached earlier this year that would require major spending reductions as tax cuts passed under former president George W Bush expire.
In the past, the Obama's end-of-the-year holiday in his native state had stretched into the new year. But with a deal still out of reach, the president can ill afford the public relations problems that would arise from being on vacation while the country heads uncertainly toward a deadline, which could have a serious impact on the economy.
Both chambers of Congress will also come back from their holiday hiatus today.
"At this point, there's zero per cent chance of a big deal and maybe a 10 per cent chance of a small deal before January 1," said Stan Collender, a former staff member of the House and Senate budget committees. He has predicted a no-deal scenario since before Memorial Day, and said the past two weeks of inaction reinforced his projection.
Obama's last contact with congressional leaders was Friday, when he met Senate Majority Leader Harry Reid, and spoke by phone with Republican House Speaker John Boehner.
Before leaving for Hawaii, Obama urged all parties to use the Christmas break to "cool off".
Venting frustration with Republicans, Obama urged lawmakers to pass scaled-down legislation that would at least prevent taxes from rising for the majority of Americans, those making US$250,000 or less a year.
The move would satisfy Obama's demand to raise taxes on the richest Americans. The president only envisions extending the lower rates for middle class earners.
House Republicans led Boehner have meanwhile punted the problem to the Democratically led Senate, asking Obama and Reid to write up legislation that can pass both houses.
Until December 17, Obama and Boehner had been edging closer to a deal that included US$1 trillion each in tax increases and spending cuts. Boehner had put tax-rate increases on the table for income above US$1 million a year, infuriating some lawmakers backed by anti-tax Tea Party groups.
That was the proposal he pulled from the House floor three days later, rather than see it defeated by his own caucus members. With the collapse of Boehner's plan, lawmakers were increasingly worried no deal can be reached.
Republican Senator Kay Bailey Hutchison said any action in the final days of the year would be "a patch". "In four days we can't solve everything," she said.
But there's still some optimism in Washington.
"There's still a chance for them to get a deal," said Ron Bonjean, a Republican strategist. "It grows more unlikely by the day, and there's not a lot of days left."
The New York Times, Bloomberg, Associated Press, Agence France-Presse