December 18, 2012 7:08 pm

Compromises raise hopes of fiscal deal

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President Barack Obama and John Boehner, Republican speaker of the House of Representatives, head into the final round of negotiations over the fiscal cliff, amid rising hopes for a deal after they narrowed key differences in the past few days.

Mr Boehner on Tuesday said he was preparing a back-up plan in case talks failed, proposing a vote in the lower chamber to prevent a tax rise for those earning less than $1m.

Taxing the rich

Taxing the rich

But the move – which was rejected by the White House – was seen more as an attempt to force concessions from Mr Obama than a sign that talks were collapsing.

Mr Obama and Mr Boehner have held face-to-face talks several times over the past week, in an attempt to find common ground. They are facing a tight deadline. Unless a deal is reached by January 1, the US will be hit by $600bn in automatic tax rises and spending cuts.

As they try to craft a broad deficit reduction deal, both sides face growing pressure from the wings of their parties not to compromise.

Against this backdrop, Mr Obama and Mr Boehner are trying to iron out their differences in four key areas: tax, spending, stimulus and borrowing.

Tax – narrowing of differences over wealthy

Both Mr Obama and Mr Boehner have taken big strides towards each other on the issue of taxing the wealthy in recent days, abandoning long-held positions that have been a source of friction over the years.

First, Mr Boehner said he would allow tax rates to rise from 35 per cent to 39.6 per cent for those earning more than $1m, a reversal of his previous opposition to any tax rises.

Then, Mr Obama said he was no longer seeking higher taxes on households earning more than $250,000, a position on which he successfully won both presidential elections in 2008 and 2012. Mr Obama said he could settle for a higher threshold, and let tax rises kick in at $400,000 . A final compromise could fall somewhere in between.

In addition, to complete a package worth more than $1tn in revenues over 10 years, Mr Obama and Mr Boehner want to set in motion a tax reform process next year that could limit deductions and lower rates for business and individuals.

Spending – Boehner secures concession

Mr Obama and Mr Boehner are closer than they have ever been to reaching agreement on a fresh package of spending reductions. On Monday,
Mr Obama made a big concession when he backed a plan to introduce a less generous measure of inflation – known as the chained consumer price index – into calculations of government benefits, including Social Security pension payments. This had been a critical demand from Mr Boehner and Republicans, who want to see big spending cuts as part of any package.

The White House is also offering $400bn in health spending reductions, which remains a sticking point because Republicans would like to see more dramatic cuts, especially to Medicare, including an increase in the age of eligibility for government health coverage for the elderly.

Any deal is also likely to include other cuts to mandatory spending programmes, such as farm subsidies, as well as at least $200bn in reductions in spending on government agencies, including the Pentagon. The cuts approved in any package would replace the “sequestration” – a mix of $100bn in annual across-the-board cuts to all government programmes that are opposed by both Republicans and Democrats.

Stimulus – focus on jobless benefits

The White House and many congressional Democrats have pushed hard for some short-term fiscal stimulus measures to be included in the talks but so far they seem to have had limited success.

On Monday, Mr Obama dropped his demand for an extension of the payroll tax cut, in a move that will lead to higher taxes on wages for all workers from January 1.

Some Democrats were hoping this could be replaced by a new middle-class tax cut, but Republicans are resisting such measures.

In the final round of talks, however, Mr Obama is still demanding a renewal of emergency jobless benefits, which are scheduled to expire, as well as new funds for infrastructure projects. The boost to unemployment insurance could well make it into a final package, but the infrastructure spending may be a long shot.

Borrowing – move to raise debt ceiling

If Congress does not raise its debt limit by February, the US could come close to default, as it did in August 2011, when it suffered its first ever downgrade of its triple A rating.

Mr Obama had initially wanted a permanent mechanism in place to avoid a repetition of last summer’s debt ceiling showdown, but Republicans resisted this.

Now Mr Obama is asking for what is essentially a two-year increase in the debt limit, to carry the US past the 2014 midterm elections. Mr Boehner has signalled he is open to raising the debt ceiling for one year, so it is unclear where the compromise will be reached.

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