US budget deal elusive as deadline looms large

US President Barack Obama and congressional leaders met yesterday for the first time since November, with no sign of progress in resolving their differences over the federal budget and expectations low for a deal before January 1st.

Instead, members of Congress are increasingly looking at the period after the December 31st deadline to come up with a retroactive fix to avoid steep tax rises and sharp spending cuts that economists have said could plunge the country into another recession.

Politically palatable

With taxes on Americans set to rise when rates established under former president George W Bush expire on December 31st, lawmakers would be able to come back in January and take a more politically palatable vote to cut some of the tax rates.

The new factor in the mix was involvement by Republican Senate Minority Leader Mitch McConnell, who spoke to Mr Obama this week and expects a new proposal from the president which he would consider.

The New York Times reported congressional officials saying staff-level talks between the White House and the Senate Republican leader revolve around a deal that would extend expiring Bush income tax cuts up to $400,000 (€303,000) in income.

Some spending cuts would pay for a provision putting off a sudden cut in payments to medical providers treating Medicare patients. The deal would also prevent an expansion of the alternative minimum tax to keep it from hitting more of the middle class. It would extend a raft of already expired business tax cuts, like the research and development credit, and would renew tax cuts for the working poor and the middle class included in the 2009 stimulus law. The estate tax would stay at existing levels.

It would not stop automatic spending cuts from hitting military and domestic programmes beginning on Wednesday, nor would it raise the statutory borrowing limit, which will be reached on Monday. Congressional aides said those issues would be dealt with early next year in yet another showdown.

White House officials denied that any such offer was developing and said that the president was sticking with his insistence that household income only up to $250,000 would be protected from tax increases.

Investors fretted

US stocks fell yesterday, with the Dow Jones industrial average dropping 0.48 per cent as investors fretted about the lack of certainty.

“Regardless of whether the government resolves the issues now, any deal can easily be retroactive.” said Richard Weiss, senior manager at American Century Investments. (Reuters/New York Times)

The US debt limit: Why it's an issue now

What is the debt limit and why does the US have one?

The debt limit is the total the US Congress has allowed the government to borrow to meet obligations. The treasury notes the debt limit “does not authorise new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made.”

Introduced during World War 1, the debt limit gives Congress the power to keep government spending in check – a responsibility some critics argue the Tea Party-powered Republican majority in the House of Representatives has taken to extremes.

Why is it an issue now?

The $16.4 trillion borrowing limit is scheduled to be breached on December 31st. The US is only about $95 billion away from its debt ceiling.

US treasury secretary Tim Geithner said the treasury would halt the issuance of special securities primarily purchased by local governments to give the federal government more time to finance its operations before its borrowing authority is shut off.

The US issues new debt to finance the operations of government, such as paying salaries to members of the military, building projects and payments on existing debt.

The suspension of the securities issuance, along with other “extraordinary measures” that Mr Geithner detailed, such as fiddling with federal government employee pension funds and a government account used to buy and sell foreign currencies, amount to little more than accounting measures.

The moves will give the US a $200 billion cushion but the treasury will only get about two extra months before it hits the debt limit.

How does this all fit in with the fiscal cliff?

In the view of some, it gives House Republicans a powerful tool they can use to bludgeon the White House and extract concessions during the fiscal cliff talks.

The US treasury’s website states: “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.”