Washington lawmakers have until Tuesday to come to an agreement which will cancel the across-the-board spending cuts and automatic tax increases. If not Americans can expect the economy to tumble off what has been so famously dubbed “the fiscal cliff.”
Falling over this cliff, economists affirm, will adversely affect financial markets around the world and send the US economy into a nose dive back into recession. Therefore Republicans and Democrats are working overtime, including holding a rare Sunday session, to come to an agreement whereby taxes are maintained at today’s levels for the nation’s middle class, while entitlement and other programs are cut according to the desires and needs of legislators.
“Now I think that over the next 48 hours, my hope is that people recognize that, regardless of partisan differences, our top priority has to be to make sure that taxes on middle-class families do not go up. That would hurt our economy badly,” Obama said in an interview.
“Democrats and Republicans both say they don’t want taxes to go up on middle-class families. That’s something we all agree on. If we can get that done, that takes a big bite out of the ‘fiscal cliff.’ It avoids the worst outcomes.”
Obama has a plan even if the worst case scenario transpires and no agreement is reached.
“And if all else fails, if Republicans do in fact decide to block it, so that taxes on middle class families do in fact go up on January 1st, then we’ll come back with a new Congress on January 4th and the first bill that will be introduced on the floor will be to cut taxes on middle class families,” he said.
Optimism prevailed on Wednesday on the world markets as news of an agreement to avoid the US ‘fiscal cliff’ reached investors. Political leaders in the US need to reach an agreement before January 1st, when across-the-board budget cuts and tax increases will go into effect automatically. Economists and other analysts fear that these automatic measures, which are in place to cut the US budget deficit, will send the US economy back into recession.
After lack of progress for weeks between Democratic and Republican lawmakers, several key players in the “fiscal cliff” negotiations have made moves towards a compromise, relieving the fear investors have had that a US recession was imminent, and sending global markets on a rally.
The FTSE 100 in Britain rose by 0.3 percent to 5,954.05. The DAX in Germany increased by 0.2 percent to 7,665.20. In France the CAC-40 rose by 0.3 percent to 3,659.05. Wall Street in New York will be well-placed to open higher, while Dow Jones industrial futures went up by 0.1 percent and S&P 500 futures rose slightly to 1,441.70.
The two sides of the deficit issue took to the Sunday morning talk shows airing their views on how to approach the looming fiscal cliff. The deadly combination of tax hikes and spending cuts will be automatically triggered at the end of the year if no compromise deal is reached between the sides.
Secretary of the Treasury Timothy Geithner, and Obama’s chief negotiator, urged Republicans to give specific ideas on ways to cut the deficit during his interview on CNN’s “State of the Union” television broadcast. He even predicted that the Republicans will agree to raise taxes on the wealthiest Americans in order to reach a deal by the end of the year and avoid and economic catastrophe.
Speaking on “Fox News Sunday” Republican Speaker of the House John Boehner begged to differ and reiterated his position against tax hikes, leaving the debate at an impasse.
"Here's the problem," Boehner told "Fox News Sunday" as both sides took their battle to TV talks shows. "When you go and increase rates, you make it more difficult for our economy to grow," he said.
Boehner added that if Republicans in the end did give in to Obama’s demand for $1.6 trillion in new tax revenue, “He’s going to spend it,” and not lower the deficit with the funds.
The Obama camp believes that they have the upper hand on the issue, giving Geithner the confidence to reiterate his stand that, "There's not going to be an agreement without rates heading up."
Polls show that most Americans support tax increases on the rich, and a few dissenters in what was in the past a solid wall of Republican opposition to such a move has convinced the Obama side that they will prevail on this issue.
With the tension of the election finally behind him, newly re-elected President Obama can now focus on the great challenge in front of him; the fear of falling off the great “fiscal cliff.” Confronted with a stew of tax hikes and spending cuts which are calculated to siphon off about $600 billion from the economy unless some deal is made with Congress, Obama has a lot to think about when the victory parties and acceptance speeches are history.
There are two essential but separate issues to lose sleep over: the coming expiration of individual tax cuts at the end of 2012; and tens of billions of dollars in spending cuts which will hit practically every agency like a sledgehammer, due to kick in on January 2, 2013.
Driving off the cliff could send shock waves to US markets, sending the country back into recession mode, with reverberations across the globe. It is clear that how Obama handles this crisis, especially given that Republicans won control of the House of Representatives, could make for exciting politics in the coming months.