Prospects for deal wither as ‘fiscal cliff’ looms

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Politicians in Washington appear increasingly resigned to letting the country slide off the "fiscal cliff" next week, leaving it to a new Congress to pick up the pieces later in January.

President Barack Obama and congressional leaders from both parties were set to meet Friday to attempt to craft a last-minute agreement. But the top Democrat in the Senate was pessimistic about reaching a deal to undo most of the more than $600-billion (U.S.) in tax increases and automatic spending cuts set to take effect in 2013.

While all sides said a last-minute deal remains possible, it would be modest in scale, and fall far short of the 'grand bargain' Mr. Obama had hoped for. Even then, a host of procedural hurdles and political calculations – not to mention the weather – are conspiring to undermine the chances of passing legislation by the Dec. 31 deadline. Even as the imperative for a deal heightened, with the Treasury Department's announcement that the government will hit its borrowing limit sooner than expected, the prospects for an agreement receded.

"I don't know, time-wise, how it could happen," Senate Majority Leader Harry Reid said Thursday, noting that procedural rules could complicate the ability of both the Senate and House of Representatives to pass identical legislation by Monday. "The American people are waiting for the ball to drop, but it's not going to be a good drop."

In the absence of an agreement by Monday, it would fall to the next Congress and its 79 freshmen members to cobble together a deal that undoes the bulk of next year's $110-billion in across-the-board spending cuts and more than $500-billion worth of tax increases. Without such a deal, analysts say the United States would tumble into a recession, likely dragging Canada's economy down with it.

"Both sides have an incentive to go over the cliff in the short term because that means any future vote on taxes will be to cut them, and any vote on spending will be to restore money that has been cut by the imposition of the fiscal cliff," Brown University political science professor Wendy Schiller explained in an e-mail.

"The leaders of both parties, as well as President Obama, know that they can go over the cliff, for a few weeks at least, without that much damage to the economy."

While the Senate convened on Thursday, the House did not. Republican House Speaker John Boehner held a conference call, from his Ohio home, with his members spread out across the country in their districts, reportedly telling them he was "not interested" in allowing a compromise deal to pass the lower chamber with more Democratic votes than Republican ones.

And while the Speaker nevertheless told House members to be back in Washington by Sunday, in case of a potential vote on Monday, a weekend storm is forecast that could cut off air travel into the capital.

After failing last week to rally his caucus around a bill to extend tax cuts for households earning under $1-million, analysts said Mr. Boehner may want to wait until his speakership is confirmed by the new Congress on Jan. 3 before risking another intraparty revolt.

Besides, it is not clear Mr. Reid himself could get legislation through the Senate, since he needs Republican consent to avoid an opposition filibuster. On Thursday, Mr. Reid met with Senate Minority Leader Mitch McConnell, but there was little sign of progress.

"Republicans aren't about to write a blank cheque for anything Senate Democrats put forward just because we find ourselves at the edge of the cliff," Mr. McConnell said on the Senate floor.

While hopes for a comprehensive long-term budget overhaul have faded for now, Mr. Obama has called on Congress to at least prevent a major tax increase on middle-income Americans by renewing tax cuts on households earning less than $250,000 that expire on Dec. 31. That would blunt considerably the impact of going over the so-called fiscal cliff.

Without a deal, taxes will go up for all tax brackets in 2013. But Republicans have been unwilling to heed Mr. Obama's suggestion, since it would mean giving tacit consent to tax increases on wealthier Americans. Some Republicans prefer going over the cliff, then passing legislation next month rolling back the tax increases only on the middle class. That way, they could argue they voted for a tax cut.

Even so, other hurdles have emerged that could make it harder to get any deal in January.

The Treasury Department notified Congress on Boxing Day that the federal government will hit its $16.4-trillion debt limit on Monday, putting added pressure on legislators to act soon. Without legislation to increase the borrowing limit, the federal government could default on its debt within weeks.

But the partisan disagreement over the debt ceiling is even more contentious than the wrangling over the "fiscal cliff," with Republicans insisting on $1 in long-term spending cuts for every $1 increase in the borrowing limit.