Hopes fade for deal on US budget

The chances of a US budget deal before the end-of-year deadline are fading, with congressional leaders blaming each other for their failure to reach agreement mere days before new spending cuts and tax rises kick in.

President Barack Obama phoned congressional leaders on Wednesday from Hawaii before cutting short his Christmas break to fly overnight back to Washington in a last-ditch effort to revive talks on the budget. But his intervention had little immediate impact. Harry Reid, the Democratic Senate majority leader, took to the Senate floor yesterday to criticise Republicans in the House of Representatives for not returning to the capital to continue talks.

Radio silent

“Nothing can move forward in regards to our budget crisis unless speaker [John] Boehner and leader McConnell are willing to participate in coming up with a bipartisan plan,” he said. “So far, they are radio silent.”

Mr Reid said it appeared a deal was unlikely before the January 1st deadline. “It looks like that’s where we’re headed,” he said, signalling the White House and Congress were entering a new, perilous phase. Mr Reid’s comments confirm what many in the White House and Congress had already concluded: Democrats and Republicans are too far apart on taxes and spending to strike a deal in time.

The angry rhetoric, combined with gloomy economic data, sent equity markets lower. By lunchtime, the US benchmark SP 500 index was down 1.2 per cent.

Traders reacted immediately to the latest readout on consumer confidence, which was worse than expected and suggested that the uncertainty surrounding the fiscal cliff is already hurting the economy.

The Conference Board’s confidence index fell to 65.1 in December from a revised 71.5 the previous month, when the forecast had been for a reading around 70. The index is now at its lowest for five months.

Volatile element

Wednesday’s announcement by Tim Geithner, the Treasury secretary, that the US would reach its borrowing limits on December 31st, has injected an extra volatile element to the stalled talks.

The White House and Congressional leaders are engaged in high-stakes talks to avoid $600 billion (€453 billion) in spending cuts and tax increases

Mr Geithner told Congress that uncertainty over spending and receipts caused by the fiscal cliff made it difficult to predict how long the Treasury’s emergency funding measures would stave off the arrival of the debt ceiling.

Mr Obama has insisted that the debt ceiling not be part of the budget negotiations, but Republicans want to use it to force more spending cuts, as they did in the lengthy stand-off last year.

The US is likely to hit the debt ceiling in February and needs congressional approval to extend its borrowing limits.

The talks between the White House and Congress over the budget have been stalled since Friday in the wake of a Republican rebellion against its leadership in the House of Representatives last week and a subsequently scaled-back offer from Mr Obama. – Copyright The Financial Times Limited 2012