Dec 17, 2012, 08.32 AM | Source: Reuters
The "fiscal cliff" impasse is raising the odds that Congress will fail to meet a year-end deadline to avert steep tax hikes and budget cuts that could push the nation into another recession.
With talks between President Barack Obama and House of Representatives Speaker John Boehner at an apparent standstill, analysts said on Friday that it was increasingly likely that Washington won't be able to reach a deal before January 1.
"It's time to contemplate a plunge off the cliff," Potomac Research Group analyst Greg Valliere wrote in a research note.
Obama has insisted that any deal must raise taxes on the wealthiest 2 percent of U.S. households, an idea Boehner has resisted. The two sides also are far apart on the size and composition of spending cuts that would likely be part of a deal.
Little progress was expected on Friday with Boehner set to return to his congressional district in Ohio for the weekend.
Even if Boehner and Obama were to reach an agreement, they would need time to sell rank-and-file lawmakers on the compromises it would likely include. They also would need several days to draw up legislation and pass it in the House and the Senate.
Stan Collender, a budget expert with Qorvis Communications, sees a one-in-four chance of that happening at this point.
"It's far more likely we'll go over the cliff and then fix it retroactively in January," he wrote.
If Washington does not act, tax rates are due to rise for all Americans at the beginning of next year and the federal government will have to cut spending on military and domestic programs across the board.
The resulting $600 billion hit could push the economy back into recession, but the full effect likely would not be felt for months - giving lawmakers some time after the New Year to resolve the situation.
DEAL IN PRINCIPAL?
Representative Steny Hoyer, the No. 2 Democrat in the House, said Congress could agree to keep current tax and spending rates in place for several weeks if negotiators reach a deal in principle by the end of the year but don't have enough time to pass it into law.
That probably will be impossible if Obama and Boehner have no deal in place, the Maryland lawmaker said.
"If we don't get an agreement of any type, then, yes, I think you're going to run into a hard-and-fast deadline of December 31," Hoyer said on Fox News on Thursday night.
Though the economy would likely not take an immediate hit if lawmakers miss the deadline, failure to reach a deal could spook financial markets, which have been relatively calm in recent weeks.
Still, the uncertainty over the cliff has weighed on markets and overshadowed other relatively good economic news.
"The uncertainty that (the cliff) is creating is basically holding the markets hostage in the short term," said Andres Garcia-Amaya, global market strategist at J.P. Morgan Funds, in New York.
Opinion polls show most Americans support Obama's demand to raise tax rates on the wealthiest 2 percent of households and many observers expect Republicans will ultimately go along.
The Democratic-controlled Senate has already passed such a bill and pressure is mounting on Republicans in the House to approve it as well.
That legislation would prevent tax hikes for everybody else, but it would still allow spending cuts to kick in that would hurt hospitals, defense contractors, and a range of other sectors, analysts at International Strategy & Investment wrote in a research note.
Expiring jobless benefits and payroll tax cuts also would create broad headwinds for the economy.
It also would set up months of budget battles that could create yet more uncertainty, they wrote.
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