The fiscal cliff and “Taxmageddon” are terms for what might happen at the end of this year, when various US tax cuts and benefits expire, and the automatic “sequestration” spending cuts agreed as part of last year’s debt ceiling/Super Committee deal are due to kick in. (Cardiff explained it in more detail back in November if you want a refresher on the scale and messiness of it all.)
There have been several estimates of how this might play out — Nomura for example forecast that the expiration of the Bush tax cuts alone would reduce GDP in 2012 by 1.5 percentage points. Now the Congressional Budget Office, a non-partisan agency, has published its own analysis, which paints a picture of all of the fiscal restraint measures and expiring tax cuts shaving a massive 4 percentage points off GDP growth in 2013, making for a recessionary first half: Read more
US Congress has taken a big step toward approving new rules to ban legislators from trading stocks based on information they pick up in Capitol Hill, says the WSJ. The Senate voted overwhelmingly, 96-3, to pass the legislation, called the Stop Trading On Congressional Knowledge Act, or Stock Act. The bill now moves to the House, where Republican leaders said they would vote on it next week.
Republicans in the US House of Representatives have backed down and agreed to extend payroll tax cuts for the first two months of 2012, ending the risk of a sudden tax rise on January 1, reports the FT. Under a deal with Democrats in the Senate, there will be administrative tweaks to reduce the cost to business of complying with a two-month extension, and the House and Senate will negotiate how to offset the cost of an extension for the rest of 2012. But the deal gives no ground on the main Republican demand of an immediate full-year extension paid for by limits on unemployment benefits and welfare eligibility. Reuters says House Speaker John Boehner caved in to growing criticism from within and outside his Republican Party, leading to an about-face that contrasts with a year of dominance in Congress in which their staunch opposition to higher taxes and spending yielded a string of successes.
On Tuesday night, the US House of Representatives voted 229-193 to reject a bill passed by the Senate that would have extended a cut in payroll taxes by two months. Failure to act will cause an increase in the taxes from 4.2 per cent to 6.2 per cent, affecting 160m workers, the WSJ reports. Senators have already left the capitol for the holidays, but members of the GOP-controlled House have demanded their return in order to hammer out a deal that would extend the cuts for a year. The short-term stopgap measure, designed to allow negotiations to continue in the new year, was deemed unacceptable. Senate majority leader Harry Reid has already stated that he has no plans to return to the negotiating table unless the stopgap measure is passed first.
The fate of a compromise deal to extend stimulus measures for the US economy for two months was thrown into doubt on Sunday after John Boehner, the Republican Speaker of the House, said he was opposed to the plan, the FT reports. Speaking a day after the Senate overwhelmingly approved a deal reached by the Democratic and Republican leaders in the upper chamber to extend payroll tax cuts, Mr Boehner said the bill would be rejected by rank-and-file Republicans in the House when it was taken up this week. Mr Boehner said that negotiations should be reopened and should focus on finding a solution for the entire year, rather than just the two months covered by the Senate compromise. However, Senate Majority Leader Harry Reid said that while he favoured a year long extension too, he wouldn’t negotiate a longer deal until the two month extension is passed by the House, reports the WSJ. The development raises the spectre of a year-end tax increase, says the NYT. While the House is expected to take up the bill on Monday, Senators have already finished up the last bits of their business on Saturday with the vote on the payroll tax extension and a large spending bill, said their goodbyes and left for the holidays.
The fate of a compromise deal to extend stimulus measures for the US economy for two months was thrown into doubt on Sunday after John Boehner, the Republican Speaker of the House, said he was opposed to the plan, the FT reports. Speaking a day after the Senate overwhelmingly approved a deal reached by the Democratic and Republican leaders in the upper chamber, Mr Boehner said the bill would be rejected by rank-and-file Republicans in the House when it was taken up this week. Mr Boehner said that negotiations should be reopened and should focus on finding a solution for the entire year, rather than just the two months covered by the Senate compromise. The NYT there was little indication on Saturday that the House Republicans were expected to reject the Senate-brokered bill. Senators finished up the last bits of their business, including the vote on the payroll tax extension and a large spending bill, said their goodbyes and left for the holidays. The development raises the spectre of a year-end tax increase.
American politicians on Thursday reached a tentative deal to fund an array of government agencies through September 30 and avert shutting down many of Washington’s operations starting this weekend, reports Reuters. Democratic Senator Daniel Inouye, one of the chief negotiators on the massive spending bill, told reporters the deal had been struck and the full Senate could vote on the measure as early as Friday. The House of Representatives is expected to vote on Friday, a Republican aide said. Current funding for agencies ranging from the Defense Department and Homeland Security to the Environmental Protection Agency expires at midnight on Friday. Meanwhile, work on a separate but equally important deal to extend a payroll tax cut and long-term unemployment benefits continued in Congress. Bloomberg says Senate Majority Leader Harry Reid told reporters the Democrats are considering a two-month extension of an expiring payroll tax as well as unemployment benefits if they are unable to strike a deal on a longer-term plan with Republicans.
Barney Frank, co-author of the eponymous Dodd-Frank financial legislation, will announce on Monday afternoon that he won’t be running for re-election in 2012.
Frank thus follows co-author Chris Dodd into retirement from Congressional politics. Unlike Dodd, however, we don’t expect Frank will take a job lobbying on behalf of movie stars. Read more
CBS’ flagship 60 minutes programme carried a feature Sunday night that looked at whether Congressmen have been trading stocks based on insider information. It’s a theme that’s been well covered in the blogosphere but last night it reached prime-time.
CBS didn’t allege any illegal behaviour — Congressmen aren’t subject to the same legal rules around the use of material non-public information as the rest of us — but it did refer to circumstantial evidence that members of the House may have taken advantage of confidential information they received. Read more
US lawmakers charged with crafting a deficit reduction agreement in the next three weeks remain deadlocked but fears that the impasse might lead to a new credit downgrade receded on the back of a new report from Moody’s Investors Service, the FT reports. Negotiations to strike a deal that could revive confidence in America’s ability to control its public finances are reaching a critical juncture, with a 12-member panel of Congress – equally split between Republicans and Democrats – weighing competing proposals to break the impasse. But so far there is scant evidence that a large-scale fiscal compromise is in the works, with big divisions persisting, particularly over taxes. The so-called “supercommittee” is due to report on November 23, and if a majority cannot recommend at least $1,200bn in savings for the US government over the next decade, a “trigger” will force automatic spending cuts worth that amount starting in 2013.
Democrats on the congressional committee charged with slashing US budget deficits presented a plan for more than $2,500bn in savings over the next 10 years, seeking to rekindle “grand bargain” budget negotiations that faltered in July, reports the FT. In the first concrete sign of a possible breakthrough on the 12-member panel, a majority of its Democratic members offered some cuts to benefits from Medicare, the popular government healthcare scheme for the elderly, as part of a package that would also include a big chunk of new revenues. About half of the savings would come from spending cuts, and the rest from higher taxes. One congressional aide said the move reflected an effort on the part of Democrats to “reach out” and “engage” with Republicans and draw them into negotiations on a deal that would exceed the official mandate of the panel, which is to find $1,500bn in deficit reduction measures over the next 10 years.
China’s foreign ministry said it “adamantly opposes” a bill being pushed by the Senate to allow the United States to impose duties on countries that undervalue their currencies, Reuters reports. In a statement posted on China’s official government website on Tuesday, foreign ministry spokesman Ma Zhaoxu warned the United States not to “politicise” currency issues, and said the US was using currency as an excuse to adopt protectionist trade measures that violated global trading rules. ”By using the excuse of a so-called ‘currency imbalance’, this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-US trade and economic relations,” he said. “China expresses its adamant opposition to this.”
The US Congress is renewing a push to penalise China over its currency, the FT says, potentially forcing the White House to choose between angering its Democratic base and upsetting its delicately balanced relations with Beijing. The Senate is expected to vote on anti-China trade legislation on Monday, with the bill likely to pass with overwhelming bipartisan support, before being sent to the House of Representatives. The White House has given mixed signals on the subject. The bill would require the commerce department to use estimates of currency undervaluation when calculating so-called countervailing duties, imposed against imports deemed to be state-subsidised. Although the legislation has been drawn more tightly than previous such bills, which simply proposed levying an across-the-board tariff on Chinese imports, many trade lawyers think it would still be vulnerable to legal challenge at the World Trade Organisation.
A deal reached late on Monday between top Democrats and Republicans in the US Senate to keep federal operations running until November 18, reports the FT. It was approved by an overwhelming 79 to 12 votes. The measure was designed to be approved in the upper chamber and then put pressure on the House of Representatives to pass similar legislation, one congressional aide said. In a fight that had again exposed the dysfunctionality of US politics, Congress has been squabbling over some $3bn for assistance to states ravaged by last month’s Hurricane Irene and other recent natural disasters – less than a 1,000th of projected US government outlays of $3,597bn in the current fiscal year.
The US government has been put at risk of a possible October 1 shutdown because of a partisan fight on Capitol Hill over disaster relief for victims of hurricane Irene and Democratic opposition to proposed cuts to subsidies for fuel-efficient cars, the FT reports. Although Republican leaders in the House of Representatives are seeking to appear more conciliatory following this summer’s tough debate over an increase in the debt ceiling, lawmakers voted 230-195 against a bill to keep the US government funded temporarily. The defeated proposal included $3.65bn in assistance to areas hit by the recent hurricane and other natural disasters. Eric Cantor, the number 2 House Republican, whose own district was affected by hurricane Irene, came under scrutiny after he suggested that any disaster relief funding would have to be offset by cuts to other government programmes, although he later backed off from that assertion. Later in the evening, a panel approved a measure that would allow the House to quickly reschedule another vote. But it was not clear how the substance of the bill might be changed, Reuters reports.
Barring a Republican rebellion in the House of Representatives, the Budget Control Act of 2011 will be passed by both houses of Congress on Monday, and sent to the President for his signature.
Despite the resurrection of real market-shifting news on Monday, it’s worth quickly reflecting on the deal. A few other sites have done some post-mortems from a political or policy point of view. But see below for FT Alphaville’s debt ceiling winners and losers. (It was a lot harder to find winners than losers.) Read more
Republican leaders in the House of Representatives on Thursday abandoned efforts to vote on a plan to raise the nation’s borrowing authority, deepening the US debt ceiling crisis five days ahead of a possible default, the FT reports. Several days of arm-twisting by top Republicans failed to quash a rebellion by conservative lawmakers, who say the plan remains short on spending cuts and lacks a constitutional amendment to force a balanced federal budget. With markets increasingly unnerved about the lack of progress, pressure is rising on the White House to make a new effort to broker a deal, after allowing Congress to take the lead for several days. Asian stocks fell on the news, reports Bloomberg.
Markets reflected growing concern at the impasse over the US debt ceiling limits late Tuesday and early Wednesday. In Asia, the FT reports, shares continued to struggle, with the Nikkei falling 0.6 per cent, led by banks and exporters. In the US, the S&P 500 closed 0.4 per cent lower. Treasury yields rose, the dollar hit a four-month low against the yen and gold reached a new record in response to the stand-off, reports Reuters. Congress has begun gearing up for its first critical vote on the US debt limit, but the FT says Republican leaders are grappling with a possible conservative mutiny which could threaten their hopes of avoiding a US default through a two-step increase in borrowing authority. The plan to hold a vote on Wednesday also took a hit from Congressional Budget Office analysis which showed it would save less money than anticipated. Most Democrats and the White House oppose the plan.
A deal on the debt ceiling looked further away than ever after Monday night speeches by President Barack Obama and Republican House speaker John Boehner. Mr Obama urged congressional leaders to reach a “fair compromise” over the next few days to avoid a US default, the FT reports, and warned Americans that the impasse could spark a “deep economic crisis”. In his response, Mr Boehner said Mr Obama was seeking a “blank cheque” to raise the debt limit, charging that the Democratic plan was laden with “phoney accounting and Washington gimmicks”. The LA Times says the deadline is sooner than August 2, as any legislation would need to be introduced in Congress in enough time to clear procedural deadlines. But USA Today picks up on analysis of tax receipts suggesting the government may have an extra seven to 15 days before the ceiling is well and truly reached.
US president Barack Obama and Republican House speaker John Boehner were on Thursday still struggling to overcome resistance from their respective parties to a debt ceiling deal, the NYT says. The latest talks, which focused on up to $3,000bn in savings from spending cuts and a tax overhaul, now faced most strident opposition from within the Democrats, the newspaper says. The FT reports one Democratic senator, Barbara Mikulski of Maryland, described the mood in the party as “volcanic” as the deal did not include higher tax revenues. However White House officials insisted the president would not agree to big spending cuts without also securing new revenue.
There was new hope on Capitol Hill that a sweeping deal to increase US borrowing authority and slash the nation’s deficits by $3,700bn over ten years was within reach, the FT reports, after Barack Obama backed an agreement among a group of Democratic and Republican senators. The “gang of six” plan would look to save more than $200bn in healthcare spending, Politico says, but it was unclear how the cuts would be split between Medicare and Medicaid. The Christian Science Monitor describes the key elements of the proposal, which it says will have to overcome partisan concerns and time pressure. House Republican leader Eric Cantor said the plan contained “some good ideas” but did not do enough to tackle debt levels, Reuters reports.
US Senate leaders said the chamber will remain in session until agreement is reached over the US debt limit, Bloomberg reports, as President Barack Obama threatened to veto a proposal to require the government to balance its budget as part of a debt deal. Both Democrat and Republican leaders agreed to meet every day until the matter is resolved, although as the FT reports, the White House and Congress have set a soft deadline of this Friday to reach a basic agreement. Even if congressional leaders and the White House are able to reach a deal over the next few days, the maths are tricky on getting the agreement passed. It is still unknown how many Republicans in the House may vote against any increase in the debt ceiling, but there could be dozens who oppose it.
Another weekend of business casual negotiations in Washington failed to deliver a deal to raise the debt ceiling.
In response, President Obama held a press conference on Monday morning to urge a compromise and repeat his position on the size and shape of a deal. Read more
US president Barack Obama and John Boehner, the Republican speaker of the House of Representatives, are trying to push a more ambitious agreement to save the US government some $4,000bn over the next 10 years and take on some of Washington’s sacred cows, the FT reports. However, the big question looming in Washington is whether rank-and-file members of Congress would agree to the kind of cuts to entitlement programmes and the defence budget and the new tax revenue required to strike such a deal, with much rancour in both parties regarding any compromise — particularly within the Republican party, according to the Washington Post. Bond buyers do not appear to be expecting a complete solution, but are hardly pricing in the likelihood of default, either, says the WSJ. The talks will reconvene on Sunday.
The International Monetary Fund has warned of a “severe shock” to global financial markets if the US does not move quickly to increase its borrowing authority, adding pressure on Congress and the White House to clinch a deal on fiscal policy, the FT reports. In its annual report on US economic policy, the IMF cited “unfavourable fiscal outcomes” as one of the key dangers to the country’s economic outlook. “These could take the form of a sudden increase in interest rates and/or a sovereign downgrade if an agreement on consolidation does not materialise or the debt ceiling is not raised soon enough,” the IMF said. Bloomberg reports that Standard and Poor’s and Moody’s would both cut US debt ratings if the debt limit is not increased. Meanwhile, the conventional wisdom that a debt ceiling agreement will be reached before August 2 may not be taking full account of the numbers in the House of Representatives, says the FT.
In which UBS slaps down anyone foolishly phlegmatic enough to think the US could miss the August 2 “deadline” for raising the debt ceiling, and escape unscathed.
The note, surely pitched for FT Alphaville, is entitled “What’s the Worst That Could Happen?” Read more