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SCENARIOS-Six ways the US 'fiscal cliff' crisis could end
December 22, 2012 / 12:50 AM / 5 years ago

SCENARIOS-Six ways the US 'fiscal cliff' crisis could end

WASHINGTON, Dec 21 (Reuters) - So what now?

The U.S. House of Representatives’ rejection of a bill to raise taxes on just 0.18 percent of Americans - those making more than $1 million a year - has raised questions about the Republican-led chamber’s ability to approve any plan to avert the looming “fiscal cliff.”

Unless President Barack Obama and the U.S. Congress can forge a deal during the Christmas and New Year’s holiday season, the largest economy in the world could be thrust back into a recession because of the steep across-the-board government tax increases and spending cuts that are due to kick in in January.

The threat of spending cuts and tax increases - about $600 billion worth - was intended to shock the Democratic-led White House and Senate and the Republican-led House into moving past their many differences to approve a plan that would bring tax relief to most Americans and curb runaway federal spending.

For weeks, Obama and House Speaker John Boehner, the top Republican in Congress, have struggled to find a compromise.

But after a glimmer of hope that a deal was close early this week, Boehner - apparently under pressure from anti-tax House Republicans aligned with the conservative Tea Party movement - pressed the “pause” button on negotiations.

He then tried to push a backup plan through the House late on Thursday, only to see his fellow Republicans kill it.

Where do Obama and Congress go from here? Here are some possible scenarios.


If you can’t do a huge deal, aim for a small one.

In a statement from the White House on Friday, Obama urged congressional leaders to promptly find a middle ground on a partial solution to the fiscal cliff. He called for preventing tax increases for 98 percent of Americans and extending expiring unemployment benefits. A quick deal, Obama said, would lay the groundwork for future deficit reduction.

Obama was not specific about who should be targeted for tax increases. During his re-election campaign this fall he called for raising taxes on households with net incomes above $250,000 a year. In recent negotiations with Boehner, Obama raised his proposed threshold to $400,000, compared with the $1 million level the House rejected under Boehner’s plan.

Absent from Obama’s latest offer was his demand for an increase in the U.S. government’s debt limit of about $16.4 trillion, a level likely to be reached in roughly two months.

If Congress does not raise the nation’s debt limit, by mid-February the Treasury Department would likely exhaust its ability to borrow. That would put the nation at risk of defaulting on its debt.

Obama offered no details on how large of a deficit-cutting plan he would seek next year. Also not mentioned were his previous calls for more infrastructure spending or to find ways to curb spending on Social Security retirement benefits.

A potential problem: Many Republicans would be loathe to go along with any tax increases without significant, long-term spending cuts. But House Democrats might be able to join forces with a couple dozen Republicans to pass a limited bill.


Now that the president has pared back his expectations for what can be achieved by Dec. 31, there may be little incentive to work behind closed doors on a major deficit-reduction package by year’s end.

But if Boehner were to agree with Obama the two sides are close to a major, long-term deal, they could try to achieve one.

A compromise with possibly $1 trillion in new taxes and $1 trillion in new, long-term spending cuts could be a tough sell for both Republicans and Democrats in Congress.

Boehner would have to persuade enough Republicans on the idea of tax increases.

Obama, meanwhile, would have to get Democrats in Congress to back cuts to some social safety net programs such as Social Security pensions and Medicare and Medicaid health insurance for the elderly and poor.

House Republicans appear to be the tougher sell.


A huge, year-end drop in stock indexes would send a loud message to Washington politicians to stop arguing and cut a quick but meaningful deal.

That is what happened in late September 2008, after Congress rejected a massive financial bailout package despite warnings by Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson of economic collapse if the bill failed.

The Dow Jones Industrial Average plunged more than 700 points and Congress quickly reversed course, approving the $700 billion Troubled Asset Relief Program just days later.

The “fiscal cliff” may not be as dramatic a situation, but the tax increases and cuts in federal spending could deal a stiff blow to the economy.


On Jan. 1, income taxes would go up on just about everyone. During the first week of January, Congress could scramble and get a quick deal on taxes and the $109 billion in automatic spending cuts that most lawmakers want to avoid.

Why could they reach a deal in January if they fail in December?

The reason would be that once taxes go up, it would be easier to allow a few of those increases to remain in place - mostly on the wealthy - and repeal those that would hit middle- and lower-income taxpayers.

Such a scenario would mean no member of Congress technically would have to vote for a tax increase on anyone - taxes would have risen automatically - and the only votes would be to decrease tax rates for most Americans back to their 2012 levels.


If Congress does not raise the nation’s debt limit, by mid-February the Treasury Department likely would exhaust its ability to borrow.

Republicans have withheld their approval of the debt-limit increase as leverage to try to get the kind of fiscal solution they want: Fewer increases in spending and taxes, and more cuts to Social Security, Medicare and Medicaid.

This is the strategy they employed in mid-2011 during the last fight over the debt limit, when it was raised to $16.4 trillion.

Republicans wrung spending cuts out of Democrats in return for new borrowing authority, but paid a political price. Global financial markets were rocked by the uncertainty brought on by the standoff in Congress, one ratings agency downgraded the U.S. government’s credit rating and Republicans saw their public approval ratings sink.


Under this scenario, stock markets would not tank and Washington politicians would conclude that the fiscal cliff is not such a bad thing, after all.

Congress and the White House could continue sniping at each other throughout 2013 and 2014 as they try to revamp tax policy and impose long-term spending cuts. (Editing by David Lindsey and Todd Eastham)

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