Monday 31 December 2012 19.54 GMT
President Barack
Obama, surrounded by 'middle-class Americans', said it appears that an
agreement to avoid the fiscal cliff is 'in sight'. Photograph: Carolyn
Kaster/AP
The White House and Congress were close to reaching a deal Monday to resolve the fiscal cliff crisis that threatens the fragile US economic recovery.
With only hours left until a midnight deadline for automatic tax rises and spending cuts, Barack Obama said agreement was within sight but discussions were continuing.
If no deal was concluded, every taxpayer in America would be hit with steep rises from Tuesday. These would be accompanied by deep cuts in federal spending programmes, ranging from defence to welfare, in particular unemployment benefits.
Obama, who flew back from holiday in Hawaii to deal with the crisis, told a press conference at the White House: "Today it appears that an agreement to prevent this New Year's Eve hike is within sight, but it is not done. There are still issues left to resolve but we are hopeful that Congress can get it done. But it is not done."
It appeared that the midnight deadline would pass without a vote on any deal: a Republican leadership aide said the House of Representatives would not consider a bill until Tuesday. "We still don't have a bill from the Senate and we want members to read it before they vote on it," the aide told Reuters.
Earlier on Monday, surrounded by what the White House described as ordinary Americans, Obama said such people could not afford the tax rises – an average of about $2,000 for every US taxpayer – that would result if a deal was not reached. "The economy can't afford it," he added.
Obama said the framework of the deal was that tax would not go up for most Americans. Unemployment benefits, help with university tuition and tax credits for clean energy companies would all be protected.
Tax rises would be imposed only on those earning $450,000 a year or more. The Democrats had been pushing for $250,000 while the Republicans had wanted the limit set at those earning $1m or more.
The Democrats appear to have secured protection for continued payments of unemployment benefits, which the Republicans had wanted cut. Democrats were pushing for the automatic cuts on spending across the board be postponed for at least a few months.
Obama said his preference would have been for a bigger deal, what he termed a "grand bargain" that would have dealt more broadly with America's economic problems, especially its huge deficit. But, showing his exasperation with Republicans who control the House, he said this was not possible with this Congress.
The Democratic leader in the Senate, Harry Reid, said negotiations were continuing to protect working-class families from tax increases. Addressing the Senate when it opened on Monday morning, he said: "There are a number of issues on which the two sides are still apart but negotiations are continuing as I speak. We really are running out of time. Americans are still threatened with tax hike in just a few hours," Reid said.
It is the first time Congress has met on New Year's Eve since 1995 when Washington was confronted by another Democratic-Republican economic showdown.
Obama, in spite of having won a second term, desperately needs this victory over the Republicans to prevent that second term being destroyed by repeated stand-offs with Republicans in Congress.
The danger for the Obama administration in the present showdown is that a combination of sudden tax rises and government spending cuts would have a negative impact on the country's sluggish rise out of recession. Countries that rely on trade with America could also potentially suffer.
If a deal is reached, there will be a push to have legislation rushed through the House and the Senate before Wall Street reopens on Wednesday.
The Democrats should have little problem getting a bill through the Senate where they have a majority but the House is much more difficult, given the size of the Republican majority. The Obama administration hopes that a combination of Democrats and moderate Republicans will see it pass.
The Republicans and Democrats have been struggling since Obama's re-election in early November to find a compromise. The Democrats want to see tax rises only for the wealthiest, which the Republicans have resisted. The Democrats want to see the Defense Department take the brunt of the spending cuts while the Republicans have pressed for the onus to be shifted to welfare spending.
Obama and the Republican leader in the House, John Boehner, came close to reaching a "grand bargain" in the run-up to Christmas but the talks collapsed. The Democrats blamed Boehner for being unable to secure the support of Tea Party-backed Republicans in the House, while Boehner blamed Obama for failing to give him enough concessions on tax and spending.
The baton after Christmas was passed to Reid in the Senate, and his Republican counterpart Mitch McConnell. But talks between them broke down over the weekend.
Next up were talks between McConnell and vice-president Joe Biden who negotiated throughout Sunday and into the early hours of Monday morning, resuming again at dawn.
Reid, speaking in the Senate, said: "Whether or not we reach an agreement in the short time we have left will need co-operation on both sides to protect taxes going up tomorrow for every family in America. I repeat there are still some issues that need to be resolve before we can bring legislation to the floor."
If no deal is in place on January 1, a single person earning $100,000 a year will face a $5,314 rise in taxes, and draconian spending cuts will be imposed across the board, in particular military spending and welfare benefits.
With the war in Iraq over and US combat involvement in Afghanistan winding down, the Pentagon is vulnerable to spending cuts, in particular expensive equipment programmes. If no deal is in place on January 1, the Pentagon, as a first step, will have to inform its 800,000 civilian employees to prepare to take mandatory leave to save money.