Republicans made their first formal proposal to avert America's fiscal cliff, offering to increase government revenues by $800-billion (U.S.) over a decade, but the plan does little to narrow their differences with the White House.
House Speaker John Boehner sent U.S. President Barack Obama the counteroffer Monday after Treasury Secretary Timothy Geithner used the Sunday talk show circuit to back Republicans into a corner, calling on them to back their criticism of the President's plan with a serious pitch of their own.
Resolving the fiscal cliff is the talk of Washington and has preoccupied investors around the world. In the absence of a budget deal, $600-billion in tax increases and spending cuts would automatically kick in in 2013, possibly throwing the world's largest economy into a new recession. A report Monday showed U.S. factory production stopped increasing in the past month, reinforcing numerous comments by executives in recent weeks that uncertainty over U.S. fiscal policy is forcing them to leave their money in the bank.
Forecasters, including the U.S. Federal Reserve Board, say the full impact of all the budget measures could cripple demand. Most, however, expect some kind of resolution before the end of the year, though not before Democratic and Republican negotiators do their utmost to win concessions from the other side.
While the Republican offer could move negotiations along, there appeared to be little in its proposal aimed at pleasing Democrats. Mr. Boehner and six co-signers said for the first time publicly that they are comfortable with $800-billion in additional taxes over 10 years, half of what Mr. Obama says is necessary to reverse four consecutive years of $1-trillion deficits.
The Republicans also said flatly that the tax rates must stay at current levels – a direct challenge to the President's insistence that rates paid by the wealthiest Americans should rise.
Unsurprisingly, the White House rejected the Republican offer. Mr. Boehner suggested $1.4-trillion in spending cuts, considerably more than the $600-billion in reductions the White House proposed last week.
In an attempt to seek leverage, Mr. Boehner said the Republican revenue proposal was based on a suggestion of Erskine Bowles, the former White House chief of staff who was the Democratic co-chair of Mr. Obama's 2011 debt commission. Republicans say new revenue should be raised by closing loopholes and limiting tax breaks.
"Notably, the new revenue in the Bowles plan would not be achieved through higher tax rates, which we continue to oppose and will not agree to in order to protect small businesses and our economy," Mr. Boehner's letter said.
U.S. stocks slipped Monday, as the Institute of Supply Management's manufacturing index dropped to 49.5 in November from 51.7 the previous month. A reading above 50 signals increased output, and a reading below 50 signals contraction. Most Wall Street analysts were expecting another month of growth, according to surveys. The November result was the lowest since July, 2009.
The index is based on a survey of purchase managers, and the "fiscal cliff was high on respondents' list of worries," noted Joshua Dennerlein, an economist at Merrill Lynch. Hurricane Sandy appeared to have little impact on the data, economists said.
The fiscal cliff is "paralyzing domestic decision making," compounding weaker demand for exports from Europe, which is struggling with a recession, said Nigel Gault, chief U.S. economist at IHS Global Insight.
The Republicans would cut spending on entitlement programs, such as Medicare and Medicaid, by $900-billion and save an additional $300-billion over the next decade by reducing discretionary spending. They would save another $200-billion by revising the way cost-of-living allowances are calculated for recipients of Social Security and other retirement programs.
Mr. Geithner on Sunday said the administration is open to adjusting Social Security, but separately from the fiscal cliff negotiations. The White House's proposed cost-saving measures include reduced farm subsidies and making richer Americans pay higher premiums for Medicare, the federal health program for seniors.