American lawmakers appear set to push vital budget negotiations to the limit, setting the stage for an edgy December in global financial markets, as investors attempt to distill reality from political bluster.
John Boehner, the Republican speaker of the House of Representatives, raised the stakes Sunday, saying in an interview with Fox News Sunday that "there's clearly a chance" the U.S. could topple over the fiscal cliff at the end of the year.
"We're nowhere," Mr. Boehner said, ridiculing the initial White House proposal tabled late last week, which seeks $1.6-trillion (U.S.) in new tax revenue – twice as much as what Republicans say is acceptable. "I was flabbergasted," he added. "Three weeks have been wasted."
Mr. Boehner's negative tone could jar financial markets, which generally have been stronger since the U.S. Thanksgiving holiday, thanks to reassurances from Democratic and Republican leaders that Washington's penchant for vitriol and brinkmanship had been curbed by the election.
At issue is some $500-billion in tax increases and $100-billion in spending cuts scheduled for 2013. The combination has come to be known as the fiscal cliff because it would so dramatically change the trajectory of the U.S. budget deficit.
In some ways, that would be a good thing. The U.S. has recorded four consecutive budget deficits in excess of $1-trillion, and its debt has grown to the equivalent of about 70 per cent of its gross domestic product. Unless that trend is reversed, the U.S. risks losing the confidence of international bond investors, which would result in higher interest rates that only would exacerbate the problem.
However, most economists agree that the U.S. economy is too fragile to absorb the shock to demand that toppling off the fiscal cliff could create. Unless the blow is softened, forecasters including the International Monetary Fund, the Congressional Budget Office and the Bank of Canada say the U.S. is facing another recession.
On the flip side, removing the threat posed by the fiscal cliff could provide a jolt to confidence that boost economic growth.
There is "enormous potential" for the United States economy once the threat represented by the cliff is lifted, Treasury Secretary Timothy Geithner told NBC's Meet the Press in an interview that was recorded Friday and broadcast Sunday.
Chief executives of some the U.S.'s biggest companies, including Goldman Sachs Group Inc.'s Lloyd Blankfein and Honeywell International Inc.'s David Cote, have suggested in recent weeks that they would be satisfied with any agreement, so long as it ends the uncertainty.
The closer negotiations get to the January deadline, the more anxious executives and investors will become. But as far as Washington is concerned, it's still early in the game. "There's a little bit of chicken going on, in terms of gamesmanship," Tom Cole, a Republican congressman from Oklahoma, said Sunday on ABC's This Week.
Both sides have indicated they would like an agreement by Christmas. The tax increases don't go into effect until the New Year and, even then, there are suggestions that the Treasury has the authority to put off actually collecting the higher taxes.
After dealing with criticism that he was too willing to capitulate in the face of Republican stubbornness, Mr. Obama now appears to be the one digging in his heels.
The president's initial bargaining position is essentially taken from last year's pre-election budget proposal, which was soundly rejected by House Republicans. Along with the tax increases, Mr. Obama suggested spending $50-billion on infrastructure, and said he would accept $600-billion in budget cuts. The spending reductions include reduced farm subsidies and requiring wealthier Americans to pay higher premiums for Medicare, the federal health program for seniors.
Mr. Boehner surprised Washington insiders by conceding on the day after Mr. Obama won re-election that it would be necessary to raise revenue to get the U.S.'s fiscal house in order.
The debate since has been dominated by how much revenue should be raised, and how to go about doing it. Mr. Boehner said Sunday that Republicans believe the right amount of revenue is in the "range" of $800-billion, and that the money should be generated by closing loopholes and curbing tax breaks.
"We have a serious spending problem," he said. "It is going to be dealt with."