Deadlock in Congress leaves a nation careening toward ‘fiscal cliff’

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With only hours to go, the United States is still careening toward the "fiscal cliff."

Weekend talks between top Republican and Democratic leaders in the Senate failed to produce a hoped-for deal to avert more than $500-billion (U.S.) in tax increases and spending cuts that are set to take effect this week.

With the clock ticking toward Monday night's deadline, Americans risk being left yet again in the lurch due to gridlock in Congress. Left intact, the automatic tax increases and short-term spending cuts could thrust the U.S. and Canadian economies into recession.

"What's been holding us back is the dysfunction here in Washington," President Barack Obama said during a rare appearance Sunday on Meet the Press. "At a certain point, it is very important for Republicans in Congress to be willing to say we understand we're not going to get 100 per cent."

A deal now hinges on overnight talks between Vice-President Joe Biden and the top Republican in the Senate, Mitch McConnell, that began on Sunday afternoon. The Kentucky GOP senator asked for a new "dance partner" after weekend negotiations between him and Democratic Senate Majority Leader Harry Reid proved fruitless.

Despite a buzz of weekend activity on Capitol Hill, normally dormant at this time of year, the parties remained deadlocked on Sunday over Mr. Obama's call for tax increases to proceed only on the wealthiest Americans.

Republicans have fought all tax increases, unless they are accompanied by other concessions that Democrats find hard to swallow.

The failure to reach a deal to roll back scheduled tax increases on the middle class and more than $100-billion in short-term spending cuts would likely push the U.S. economy into recession in 2013. Bank of Canada Governor Mark Carney has also warned it would create an "immediate risk" for this country's economy.

During his weekend talks with Mr. Reid, Mr. McConnell demanded future reductions in Social Security benefits in exchange for tax increases on the rich. The GOP plan involved changing the way annual cost-of-living increases are calculated for pension benefits.

But Democrats said the change, which would primarily hurt low-income pensioners, was a "poison pill" intended to make a deal unpalatable to their base.

"We're not going to have any Social Security cuts at this stage," Mr. Reid said on the Senate floor. He added that Democrats would be open to reforming Social Security as part of a comprehensive budget deal, but not "as part of a smaller, short-term agreement, especially if that agreement gives more handouts to the rich."

On Meet the Press, Mr. Obama also said he would be willing to consider the adoption of so-called chained CPI to calculate annual increases in Social Security benefits as part of a broader budget deal. After his re-election in November, the President undertook talks with GOP House of Representatives Speaker John Boehner that were aimed at averting the fiscal cliff with a long-term deal to cut the deficit by more than $3-trillion over 10 years. But those negotiations never went very far.

Using chained CPI to calculate Social Security adjustments is "highly unpopular among Democrats," Mr. Obama conceded. "But in pursuit of strengthening Social Security for the long term, I'm willing to make those decisions."

Meanwhile, Mr. Biden's participation in the talks was seen as a hopeful sign. The vice-president and Mr. McConnell pieced together the mid-2011 compromise that broke weeks of partisan stalemate surrounding a normally routine increase in the federal government's borrowing limit.

That earlier deal, however, set the scene for the fiscal cliff showdown. The 2011 agreement called for $110-billion in automatic cuts in 2013 unless Congress voted to replace them with less punishing measures.

Those spending cuts coincide with the Dec. 31 expiry of more than $400-billion in Bush-era tax cuts. They were set to expire in 2010, but Mr. Obama and Congress agreed to extend them for two more years.

If Mr. McConnell and Mr. Biden fail to reach a deal by early Monday, Mr. Obama said he would ask Mr. Reid to hold a vote on the President's proposal to extend the Bush-era tax cuts for households earning less than $250,000. The Obama plan would also extend jobless benefits for the long-term unemployed, and prevent cuts in Medicare payments to doctors.

"The point is democracy has always been messy, and we're a big, diverse country that is constantly sort of arguing about all kinds of stuff," Mr. Obama told Meet the Press. "But eventually we do the right thing."

Mr. Obama is no longer pushing for an extension of a payroll tax cut that was first adopted in 2011. That means a worker earning $50,000 will pay about $1,000 more in Social Security taxes in 2013, regardless of the outcome of the fiscal cliff talks.