Obama’s race against time to save tax deal

A LATE political truce over the US budget was thrown into doubt last night as Republican leaders threatened to quash President Obama’s plan to avert the so-called fiscal cliff.

After warring politicians in the Democrat-controlled Senate passed a bill to avert a round of automatic tax rises and spending cuts, senior figures in the Republican-dominated House of Representatives suggested the spending cut measures proposed by Obama did not go far enough.

On an extraordinary New Year’s Day in Washington, Republicans scrambled to reach a consensus over the Democrat proposals. John Boehner, the Republican leader in Congress, called representatives together yesterday evening to decide whether to demand $300bn (£185bn) of extra spending cuts or simply to hold a yes-or-no vote on the Senate-approved bill.

Eric Cantor, Congress’s second most-senior Republican, said he did not support the bill, and Boehner said there was “universal concern” from Republican leaders over the lack of spending cuts.

Although the bill won approval from most Republicans in the Senate, passing by 89 votes to eight, the comments from Congress leaders thrust its passage into uncertainty. House Democrats were likely to vote for the deal, but the Republican majority was divided over what action to take.

Indications from Washington last night suggested that the House was likely to send an amended version of the bill back to the Senate. However, a Senate aide said an amended deal would not be passed.

Both sides were desperate to reach a deal before financial markets opened.

A resolution is required to claw the US back from the so-called fiscal cliff – a round of automatic tax hikes and deep spending cuts that most economists believe will plunge the US into recession. The country technically fell off the cliff on New Year’s Day as the deadline for averting the measures was broken, although a deal would stop their introduction.

Action is needed to address the US’s budget deficit, which is set to be around $1 trillion.

The Senate bill, if passed, would see wealthier US taxpayers hit by the country’s first hike in income taxes for almost 20 years. Marginal tax rates on those couples earning over $450,000 – the top one per cent of earners – would jump from 35 per cent to 39.6 per cent, clawing in $600bn over 10 years.

Though it only affects the top one per cent, the income tax hike would be the first since 1993, and would contravene many Republicans’ promises never to add to their constituents’ income tax bills.

Tea party Republican senator Rand Paul, one of the eight voting against the deal, attacked the compromise measure for failing to rein in spending despite hiking taxes.

Although President Obama had previously called for allowing taxes to rise on any couple earning over $250,000 – the top two per cent – Democrats will see the deal as an improvement over Republican leader John Boehner’s offer to let taxes rise only on those earning $1m or more. Obama said: “While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay.”

On the spending side, the deal postpones the automatic spending cuts known as the sequester for two months. The extra two months will cost around $24bn, of which half will come from extra tax, and the other half from reduced spending. The plan would also cancel a $900m salary boost for members of Congress.

If the talks between the Republicans and Democrats fail to reach a deal in the next few days then the US economy could bear the full brunt of the fiscal cliff measures.

These would amount to $607bn of total fiscal consolidation, or some 4.9 per cent of GDP, significantly improving the US budget position by erasing a large fraction of the yearly deficit, currently around $1.1 trillion.

But the Congressional Budget Office (CBO) – the official US fiscal watchdog – says such cuts would plunge the US back into recession, echoing the judgements of most economists.

Even if the deal passes, future budget wrangling is almost inevitable, as most of the spending cuts are only delayed for two months, and the government has hit its borrowing limit.

■ The CBO calculates that the bill’s tax hike would rake in $620bn in 10 years

■ But the office says the bill would add $4 trillion to deficits in the next decade

■ The average household would pay $3,500 more, if the deal does not pass, according to the Tax Policy Center

■ The economy would shrink 0.5% in 2013, if no deal was reached on the fiscal cliff