December 14, 2012 7:53 pm

Rice sacrifice signals tougher fiscal fight

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Two years ago, when Democrats erupted in fury at Barack Obama’s deal with Republicans to extend the Bush-era tax cuts across the board, the president soothed supporters by promising he would not compromise on the issue again.

If there was ever doubt that Mr Obama might not stick to his guns in the latest budget negotiations, the seemingly unrelated withdrawal of Susan Rice from her bid to replace Hillary Clinton as secretary of state should end them.

Many Democrats were pained by Ms Rice’s withdrawal in the face of Republican attacks, with one report saying “cabinet-level women” had been angered that the White House did not fight harder to save her.

“As a human being, she doesn’t deserve the attacks upon her that were false. And they were really outrageous,” Madeleine Albright, the former secretary of state who has known Ms Rice since she was a child, told CBS.

Ms Rice had come under fire for comments in the wake of September’s attack on the US consulate in Libya, when she repeated the intelligence community’s initial view that the assault arose out of a demonstration.

The administration now acknowledges it was a planned terrorist attack. Ms Albright made no comment on the White House’s role in Ms Rice’s decision.

But however steeled the administration had been to defend Ms Rice through a rough Senate confirmation, Mr Obama’s acquiescence in her retreat unambiguously clears the decks for a tougher line in the budget talks.

Mr Obama met John Boehner, the Republican Speaker of the House of Representatives, on Thursday evening, in their latest face-to-face effort to meet the end of the year deadline for a new budget agreement.

If they fail, the US economy will be hit by a $600bn combination of automatic tax increases and spending cuts in 2013, a scenario known as the fiscal cliff, which is likely to trigger a fresh recession.

The two sides remain at odds over Mr Obama’s insistence that tax rates rise for the wealthiest 2 per cent of Americans as part of what he calls a “balanced” deal to reduce the deficit.

Mr Boehner has offered to reform the tax code to raise extra revenues, but has so far refused in public to countenance higher rates, which he says will especially hurt small businesses whose companies are taxed as individuals.

Unlike in his past confrontations with Republicans over the budget, Mr Obama has greater leverage this time, as the expiry of George W. Bush’s tax cuts on January 1 means taxes for all Americans will automatically rise on that date.

Mr Obama’s potent political pitch, which he has been taking to rallies round the country, is his call for Republicans in Congress to not hold so-called middle-class tax cuts hostage to protecting the wealthy.

He has faced Republicans twice in high stakes budget negotiations: in 2010, when Democrats had just been trounced in the midterm congressional elections, and last year, when conservatives threatened not to lift the US’s borrowing limits without large spending cuts. On both occasions, Democrats worried that the Republicans got the better of the president, and they see no need for Mr Obama to compromise this time on ending Mr Bush’s tax cuts for the highest income earners.

The ghosts of Mr Obama’s past compromises were resurrected by Ms Rice’s retreat, but the president is showing no sign of folding in these latest budget talks, to his supporters’ delight.

“This was the thing that Obama was most explicit about in the campaign,” said John Podesta, a former chief of staff under Bill Clinton who also oversaw Mr Obama’s 2008 transition team, in comments before Ms Rice’s withdrawal.

“Public support is increasing. He is playing a very strong hand. I just think that Republicans have misjudged him based on the 2011 negotiations.”

Mr Obama was due to meet Ms Rice at the White House on Friday afternoon, in a symbolic show of support for his bruised UN ambassador. But Mr Obama will send an even stronger signal to his base by holding his line in the budget talks, even if that means holding Mr Boehner’s feet to the fire beyond the year-end deadline.

Mr Boehner is under pressure from all sides, and may not be in a position to compromise with Mr Obama before early January when he faces re-election by his colleagues for a second term as Speaker.

Nevertheless Mr Obama is pursuing a high risk strategy, as even a short-term failure to solve the fiscal cliff could roil global financial markets.

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