Hopes rise in fiscal cliff negotiations

US congressional leaders struck an unusually uniform note of optimism after their first official talks with President Barack Obama on urgent budget measures to prevent automatic spending cuts and tax rises next year.

John Boehner, the Republican speaker of the House of Representatives, and Mitch McConnell, the top Senate Republican, both said they had put extra revenues on the table in the negotiations and struck a sharply different tone compared with the fraught fiscal policy standoffs before the US election.

Mr Boehner said it had been a “constructive” meeting at the White House as he proposed a two-step “framework” for a deal. This would include longer-term targets for both revenue increases and spending cuts, to be finalised next year in an overhaul of the tax code and government programmes.

“It’s going to be incumbent for my colleagues to show the American people that we’re serious about cutting spending and solving our fiscal dilemma,” he said.

The White House and Congress need to reach agreement by the end of the year to avert the so-called fiscal cliff, a combination of $600bn in tax increases and spending cuts next year.

The fiscal cliff is a legacy of a bitter two-year war between Democrats and Republicans over the budget and their inability to agree on a long-term solution to the country’s fiscal problems.

But Mr Obama’s convincing re-election, and the looming December 31 deadline, have created an improved atmosphere for the negotiations, and underlined the political cost of the brinkmanship that both sides have engaged in.

“We’re going to do it now,” said Harry Reid, the Democratic Senate majority leader. “We’re not going to wait until the last day of December to get it done.”

Neither camp indicated how their respective plans would solve one of the most difficult issues: Mr Obama’s insistence that tax rates must rise for the wealthiest – a measure the Republicans oppose. It could also be hard to find consensus on targets for tax and spending reform.

Before the meeting, Mr Obama reiterated his call for a “balanced” agreement, code for his demand that the tax cuts introduced under George W. Bush’s presidencyfor the top two per cent of earners must expire.

Republicans argue that any new revenues should be generated from economic growth and by limits on tax deductions, not by lifting marginal rates.

A White House spokesman also said later that the talks had been “constructive”.

Mr Obama and Mr Boehner tried to strike a deficit “grand bargain” in July 2011 but failed. They had little direct contact over the past year in the run-up to this month’s presidential election.

There have been signals from both Mr Obama and Mr Boehner in recent days that there could be scope for a middle ground on taxes, but the rift will still be difficult to overcome.

Mr McConnell also raised an issue that Republicans say should be part of any long-term deal: limiting health – and perhaps also pension – benefits for future retirees.

He said Republicans “fully understand that you can’t save the country until you have entitlement programmes that fit the demographics of the changing America in the coming years”.

Beyond taxes, Mr Obama and Republicans will have to finalise a deal to stop the current so-called sequestration, involving $100bn in spending cuts – including a big reduction in the Pentagon budget – due at the beginning of the year. But the two sides disagree on how to replace these across-the-board cuts with more targeted measures.