With Congress back to work, averting U.S.’s ‘fiscal cliff’ in focus

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After an August break and back-to-back party conventions, members of Congress are returning to work on Monday – though that might be a generous description of what they are (or are not) up to.

With an election less than two months away, there is little hope left that President Barack Obama can come to an agreement with the House of Representatives and Senate before then to avert the so-called fiscal cliff that threatens the American economy on Jan. 1. That is when massive tax increases and spending cuts are set to take effect unless legislation is passed to avoid them.

The most likely scenario is another down-to-the-wire episode of brinksmanship in December similar to the fateful debt-ceiling negotiations that occurred during the summer of 2011.

If Mr. Obama is re-elected on Nov. 6 and Republicans fail to gain control of the Senate, the President would likely have a stronger negotiating hand than in mid-2011. He could conceivably push through tax increases on the wealthy while extending tax cuts for households earning less than $250,000 (U.S.), in exchange for slowing the pace of defence cuts.

If GOP nominee Mitt Romney wins and Republicans pick up seats in Congress, Mr. Obama might have to sign off on a deal that extends, at least temporarily, Bush-era tax cuts for everyone and restores proposed cuts in military spending.

But before then, the uncertainty is sure to sow nervousness in financial markets and lead businesses to prepare for the worst – no deal at all – and thereby depress investment and hiring.

Already-low investor confidence about the ability of the White House and Congress to come to a deal might be further undermined by the Tuesday release of Bob Woodward's The Price of Politics.

The Washington Post investigative reporter's latest tome examines the Obama administration's conduct of fiscal policy, with a particular focus on the 2011 debt ceiling showdown. He describes a chaotic negotiation in which leadership and trust were lacking on all sides.

"It was increasingly clear that no one was running Washington," Mr. Woodward writes in an excerpt of the book, published in Sunday's Post. "That was trouble for everyone, but especially Mr. Obama. Although running things is a joint venture between the president and Congress, a president has to dominate Congress. The last president to fold was George H.W. Bush, who gave in to Democrats' demands that income taxes be raised in a 1990 budget deal. And Bush had been a one-term president."

While Republicans are eager to thwart the $500-billion in military cuts set to take effect on Jan. 1, they are unlikely to do a deal before the election that might be seen as strengthening Mr. Obama's image as a leader who can get things done.

Mr. Romney has vowed to reverse the defence cuts and preserve the Bush-era tax cuts if he is elected, instead looking for cuts in discretionary spending. But in a Sunday interview on NBC's Meet the Press, he distanced himself from the Tea Party wing of the GOP by suggesting he would take a measured approach to deficit reduction. His comments further signalled his move to the middle after veering to the right during the Republican primaries.

"I'll balance the budget by the end of my second term. Doing it in the first term would cause, I believe, a dramatic impact on the economy. Too dramatic," Mr. Romney said.

Mr. Romney also said he would maintain some popular provisions of Mr. Obama's health-care law, after repeatedly promising to suspend the entire law on the first day of his presidency.

"I'm not getting rid of all of health-care reform," Mr. Romney insisted. "There are a number of things that I like in health-care reform that I'm going to put in place. One is to make sure that those with pre-existing conditions can get coverage. Two is to assure that the marketplace allows for individuals to have policies that cover their family up to whatever age they might like."

The interview, in which Mr. Romney also insisted he would work with Democrats to get things done, led Time columnist Jon Meacham to conclude: "Those are not the words of a wild-eyed wing nut — or of a wing nut with any kind of eyes. The question for voters assessing Romney is whether they're choosing between the President and a pragmatist or between the President and an ideologue. One wonders at this point if even Romney himself is clear which he is."