Australia Markets open in 11 mins

Drama in Washington as fiscal cliff looms

Stephen Collinson
US President Barack Obama speaks following a meeting with congressional leaders at the White House on December 28, 2012. Leaders in deeply polarized Washington groped Sunday for a stop-gap deal to avert a fiscal calamity due to strike within hours and could shock markets and spark global economic turmoil.

Leaders in deeply polarized Washington groped Sunday for a stop-gap deal to avert a fiscal calamity due to strike in a matter of hours and with potential to shock markets and spark global economic turmoil.

A blame game raged even as party chiefs raced the ebbing 2012 calendar to reach a pact that would avert the "fiscal cliff" but fall well short of a hoped-for long term deficit cutting program both sides say they want.

Democratic President Barack Obama, eyeing a short-term political victory, accused Republicans of causing the mess, saying they had refused to move on what he said were genuine offers of compromise from Democrats.

"Now the pressure's on Congress to produce," Obama said, in an interview with NBC's "Meet the Press" that was recorded on Saturday, a day after he expressed modest optimism that a deal could be reached.

Obama said it had been "very hard" for top Republican leaders to accept that "taxes on the wealthiest Americans should go up a little bit, as part of an overall deficit reduction package."

But Republicans were irked by Obama's tone and matched his accusations. The ugly mood could either hint that hopes for a consensus are fading or be the kind of political-base pleasing rhetoric that sometimes heralds a compromise.

"Americans elected President Obama to lead, not cast blame," said House Republican speaker John Boehner, arguing Republicans sought a 'balanced' deficit deal while Obama insisted on higher taxes that would kill jobs.

"We've been reasonable and responsible. The president is the one who has never been able to get to 'yes.'"

The president won re-election partly on a platform of raising taxes on the rich, but Republicans who run the House of Representatives oppose tax hikes as a point of principle and claim Obama is addicted to runaway spending.

If no deal is reached, a package of tax cuts for all Americans that was first passed by former president George W. Bush will expire on January 1.

All American workers will see their own paycheck hit and the broader economy will be hit by massive automatic spending cuts across the government.

Experts expect the US economy could slide into recession if the standoff is prolonged, in a scenario that could cause turmoil in stock markets and hit prospects for global growth in 2013.

Republican Senator Lindsey Graham, speaking as his party bosses huddled with senior Democrats in search of a deal, predicted a short-term agreement would emerge, but would only postpone the budget battle by a few months.

"Hats off to the president. He stood his ground. He's going to get tax rate increases," Graham told Fox News Sunday.

"The sad news for the country is that we have accomplished little in terms of not becoming Greece or getting out of debt."

For now, the action is confined to the Senate, as Democratic leader Harry Reid and his Republican counterpart Mitch McConnell try to reach a deal that would pass their chamber and then move to the House of Representatives.

Such is the power of the conservative dominated House, it is unclear if any deal that wins Obama's stamp of approval could pass into law.

Both the House and the Senate were due back in session Sunday, for what could be a dramatic 36 hours up to the turn of the year.

If leaders fail to find an agreement, Obama has demanded a vote on his fallback plan that would preserve lower tax rates for families on less than $250,000 a year and extend unemployment insurance for two million people.

Should Republicans block that attempt, they would face being lambasted by angry voters who see their taxes shoot up -- an unenviable political plight.

Reid and McConnell were not expected to reveal their hands until later on Sunday, but some reports said they were working on a deal to put the higher taxes threshold at around $400,000 a year.

It is a measure of the dysfunction in Washington, where the political center has disappeared and the two parties share power, that the fiscal cliff was set up by both sides precisely in order to avoid such a last-minute frenzy.

The combined $500 billion whack from tax hikes and cuts to defense and social programs was supposed to be so punishing that it would force the hands of both sides to make long-term compromises on tax and spending.

But the threat has failed, and any deal that emerges now will simply set up new rows over the tax code and reform of social programs that are helping to inflate US government debt, as the annual deficit runs at over $1 trillion.

Republicans are already promising to use Obama's request to raise the $16 trillion ceiling on government borrowing, due to be hit by Monday, over the next few months to demand concessions from the president on spending.

The prolonged row is casting a shadow over Obama's plans to name his second-term cabinet, reframe his political agenda and to move on key priority issues like immigration reform and gun control.