US Republicans scrap Plan B as deal on 'fiscal cliff' stalls
Published 22/12/2012 | 05:00
THE implications couldn't be more stark, not just for the US, but for the global economy.
Economists have warned that if US President Barack Obama and the Republican-led House of Representatives fail to secure a deal on the so-called fiscal cliff before the deadline of the end of the year, then the country will slide back into recession.
Analysts have also warned that cancelling or putting off the measures without a longer term deficit deal could also be equally dangerous for the world's biggest economy.
Despite signs that a deal could be reached, the process was plunged into uncertainty after the so-called Plan B by Republican House Speaker John Boehner, that he hoped to use to pressure Mr Obama in talks, was scuppered.
He abruptly pulled the measure that would have raised taxes on those earning $1m or more after failing to get support among the more staunchly conservative ranks of the Republican party.
Stocks in Europe and the US slumped yesterday morning on news of the setback, with Asian shares declining the most in a five-week period after the Republican plan was abandoned.
Ever since Mr Obama was re-elected, the prospect of a double whammy of tax hikes and spending cuts leaving the country teetering on the edge of the abyss has been one of the main points of interest for international money markets.
Even when the president secured a second term over Republican contender Mitt Romney, the world's major indices fell amid fears that a deal may be unreachable.
The fiscal cliff is a combination of about $650bn in tax increases and spending cuts which will take effect from January 1 to reduce the federal debt – unless Congress and the president can come up with a deficit reduction plan to avoid it.
As is the case in US politics, the Democrats prefer bigger government with increased taxes on the rich and and an avoidance of spending cuts, while the Republicans favour limited government with spending cuts instead of tax increases.
Hence the deadlock in attempts to reach common ground.
The main components of the fiscal cliff include an immediate end to a series of laws commonly known as Bush-era tax cuts, the end of a 2pc payroll tax and the removal of temporary tax cuts for businesses.
Spending cuts include automatic cuts in military and defence spending, cuts to unemployment benefit and Medicare payments to doctors.
For the time being – or at least for the 10 days left before the automatic spending cuts and tax hikes are triggered – the House of Representatives is in disarray and no deal is in sight.
Most politicians will now be leaving Washington for their various home towns and districts for the Christmas period.
It may not be an overly peaceful one for them.