Fiscal cliff: White House 'deal made with Republicans'

 

President Obama said a larger deal could be accomplished "in several steps"

The US has formally missed a deadline to avert spending cuts and tax rises - the "fiscal cliff" - despite a last-ditch tentative deal in the Senate.

Vice-President Joe Biden briefed Senate Democrats behind closed doors after Republicans and the White House agreed a plan.

The Senate is expected to vote in the early hours of Tuesday morning, with the House to consider a bill later.

Tuesday is a public holiday in the US, so no immediate effects will be felt.

Analysts say if the effects of the fiscal cliff are allowed to take hold, they could spark a new US recession.

But if a bill passes both the Senate and the House over the new year holiday, the impact is likely to be minimal.

The bad news is that America is going to go over the fiscal cliff. The good news is that it probably won't hit the bottom - and no one will feel the impact.

We expect a deal to be done on Monday night and the Senate to vote on it. But the House has already gone home and will not say yea or nay to an agreement. That's why America will go over the cliff, at least technically.

But New Year's Day is a public holiday. Markets are closed around the world. The US government is also shut. Likewise, tax rises won't be felt until people get their January pay cheques.

If it is clear that the politicians are going to do a deal pretty soon, then no one will panic. At the moment, a deal seems to be close enough to touch. If it moves out of reach, then the ground will rush up to meet us soon enough.

After a long day of negotiation on Capitol Hill, signs of a deal emerged hours after the House of Representatives was dismissed for the night.

Earlier, President Barack Obama said a deal to avoid the steep tax rises and spending cuts was "within sight".

Tax cuts passed during the presidency of George W Bush formally expired at midnight (05:00 GMT).

But the proposed eventual deal appeared to extend tax cuts for Americans earning under $400,000 (£246,000) - up from the $250,000 level Democrats had originally sought.

A huge spending cut known as the sequester - that would see $1.2tn cut from the federal budget over 10 years - would be deferred for two months, reports said, allowing Congress and the White House to reopen negotiations on a wider deal.

Earlier, Mr Obama said he would had preferred to resolve the fiscal cliff through a "grand bargain" that dealt with both long-term spending and tax issues.

"But with this Congress, that was obviously a little too much to hope for at this time," he said at the White House.

Cuts debate

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
  • Date coincides with expiry of Bush-era tax cuts, which would affect all income groups and many businesses
  • Fear is that raising taxes while massively cutting spending will have a huge impact on households and businesses
  • Experts believe it could push the US into recession, and have a global impact on growth

Amid some Republican disquiet over the president's barbed remarks, the party's Senate leader Mitch McConnell quickly calmed proceedings in the afternoon.

He backed the president's assessment and said a deal should be done quickly.

"Let's pass the tax relief portion now," said Mr McConnell, who spent Sunday evening and Monday negotiating with Vice-President Joe Biden.

"Let's take what's been agreed to and get moving. We'll continue to work on finding smarter ways to cut spending."

As well as the income tax rates and spending cuts, the deal under discussion includes:

• Tax rates to rise on estate inheritances from 35% to 40% after the first $5m for an individual and $10m for a couple

• Capital gains taxes - affecting certain income from investments - would rise from 15% to 20%, but less than the 39.6% it would rise under after 1 January.

• Unemployment benefits would be extended for year, affecting an estimated two million people

• Extending tax credits that help poorer and middle-class families for five years

Sen John McCain: "President Obama sent a message of confrontation to the Republicans"

Any deal needs to pass the 100-member Senate, which is controlled by Democrats, before heading to the House of Representatives, where Republicans hold the majority.

But no votes have yet been scheduled in either chamber.

Also on Monday, the US Treasury said the federal government had hit its self-imposed borrowing limit, the debt ceiling

Treasury Secretary Timothy Geithner sent a letter to lawmakers informing them that some pension and health benefits would be suspended in order to free up borrowing authority until the end of February.

Mr Obama had asked for an extension of debt ceiling as part of the fiscal cliff negotiations, and correspondents say the issue is the next hurdle between Congress and the president.

 

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  • rate this
    -1

    Comment number 514.

    I think in the current economic climate the deal that has been struck is fair enough. But I would like to see a long term plan....say a 50 year plan to reduce the massive deficit. You can't reduce the deficit over a 4 year presidency term. The republicans and democrats should come up with a long term plan.

  • rate this
    -5

    Comment number 375.

    The American political system has become so polarized that they can't get anything agreed. Personally, the capital gains tax is a problem for me. I own a house in Seattle and I paid income, sales, and property taxes on every dollar I have put into this house. 40% if I sell it? This discourages people from investing in their communities. Also, cuts in defence will negatively affect Europe.

  • rate this
    +6

    Comment number 321.

    What a farce. Now that they will miss the deadline it's really now just a "technicality" instead of a crisis and they can patch it up in January. How long will the news media and politicians keep misleading the public for their own benefit? The best thing that could happen is no agreement and have forced spend reductions and moderate tax increases. They don't have the backbone to make real changes

  • rate this
    +7

    Comment number 257.

    So if they go over the "fiscal cliff" there will be automatic spending cuts and tax rises?

    Pardon me but that sounds like exactly what is needed.

  • rate this
    +6

    Comment number 92.

    Whether a deal is done or not, American politicians haven't exactly covered themselves in honour with the way they are handling their own home made crisis.

 

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