Global markets face the prospect of entering the new year without a US budget deal, as Democratic and Republican senators remained locked in talks yesterday ahead of the year-end deadline for agreement.

In an interview broadcast yesterday, President Barack Obama said he was optimistic Congress would avert the automatic tax rises and spending cuts that are due to start in January without a deal. But he also attacked Republicans for their “overriding” priority of protecting the incomes of the wealthy in negotiations and vowed to press his plan for higher rates if Congress failed to reach agreement in coming days.

In the absence of a deal, automatic tax rises and spending cuts of $600 billion will begin in January – a set of measures that threaten to tip the world’s largest economy into recession.

The Senate has been the focus of talks since a White House summit on Friday between Mr Obama and congressional leaders asked the upper house to negotiate a budget compromise.

Mr Obama told Meet the Press his offers to Republicans, including health and pensions, “have been so fair that a lot of Democrats get mad at me”.

“[Republicans] say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” he said.

The comments angered Republican leaders. John Boehner, House speaker, said: “Americans elected President Obama to lead, not cast blame.”

There were conflicting reports about the state of the talks yesterday, with Republican senator Lindsey Graham saying the chances for a small deal in the next 48 hours were “exceedingly good”.

Pensions

But Democrats reportedly said talks had stalled over a Republican demand that any short-term deal include a new way of calculating pensions, which they fear would mean a cut in benefits.

Mr Obama wants higher tax rates on households earning more than $250,000, the top 2 per cent, while Republicans want to set the threshold higher. The sides are also negotiating an extension to jobless benefits for two million unemployed, and proposals to lift the rates for estate taxes.

If the Senate fails to reach agreement, Harry Reid, Senate majority leader, is likely to take a bill to the chamber floor today, hours before the end of the year, for a vote on extending middle-class tax breaks. “Republicans will have to decide if they’re going to block it, which will mean that middle class taxes do go up,” Mr Obama said.

If the bill is blocked, Mr Obama said he would put the same bill to a vote once Congress reconvenes in January. – Copyright The Financial Times Limited 2012