US on edge of 'fiscal cliff'

United States President Barack Obama. Picture: AFP
| 31 December 2012
WASHINGTON - Lawmakers pushed the country to the edge of the "fiscal cliff" on Sunday as they struggled to reach a last-minute deal that could protect the world's largest economy from a politically induced recession.

Democratic and Republican leaders in the Senate had hoped to clear the way for swift action that would avert sweeping tax increases and spending cuts due to kick in on Tuesday.

But with the two sides still at loggerheads in talks, Senate Democratic leader Harry Reid postponed any possible votes and the Senate adjourned until Monday, leaving mere hours to pass any deal that may emerge through both chambers of a bitterly divided Congress.

"There are still significant differences between the two sides," Reid said on the Senate floor.

Behind closed doors, the parties kept seeking a way to bridge deep divides over taxes and spending. But even if a deal emerges in the coming hours, under Senate rules any one of the 100 senators could prevent the chamber from acting quickly.

Prospects are also uncertain in the House of Representatives, where dozens of conservative Republicans could oppose any deal that includes a tax increase on the nation's wealthiest households.

As the hours ticked away, it appeared increasingly likely that Washington's failure to act would deliver a $600 billion hammer blow to the fragile US economic recovery.

"Something has gone terribly wrong when the biggest threat to the American economy is the American Congress," said Democratic Senator Joe Manchin of West Virginia.

Americans could see a bigger bite taken out of their pay cheques starting on Tuesday as payroll and income tax cuts expire, while two million unemployed Americans could see their jobless benefits run out. Government contractors might be forced to lay off employees as $109 billion in automatic spending cuts kick in, and businesses could lose tax breaks for everything from wind power to research and development.

The uncertainty has weighed on financial markets and forced businesses to slow hiring and investment. Market participants braced for more turbulence on Monday.

"I believe investors will show their displeasure tomorrow by selling stocks if there is no deal," said Mohannad Aama, managing director at Beam Capital Management in New York.

Though corporate chieftains have lobbied lawmakers to show flexibility, Congress also faces pressure from an array of interest groups urging them not to compromise core principles.

Conservative groups have warned Republicans that a vote to increase any taxes could be held against them, while liberal and labour groups have pressed Democrats to resist any benefit cuts to popular retirement and health programs.

Lawmakers may find it easier to act once the country goes over the "fiscal cliff" on 1 January, as any new legislation can then be portrayed as a tax cut rather than a tax increase.