Fiscal Cliff Looms over US New Year

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US Republicans have cancelled a tax vote in the House of Representatives to avoid the fiscal cliff, the automatic combination of tax increases and spending cuts that will hit US economy if politicians won’t agree on a deal before the first of January.

After calling a meeting of his Republican party’s lawmakers, the House speaker John Boehner said that it would have been no vote on Thursday night on the Republican plan B as planned. “The House did not take up the tax measure today because it did not have sufficient support from our members to pass. Now it is up to the President to work with Senator [Harry] Reid on legislation to avert the fiscal cliff,” Mr Boehner said, referring to the Democratic Senate majority leader.

Mr Boehner wanted the plan to pass to increase his leverage in talks with President Barack Obama. Now the speaker of the House of Representatives sees his speakership threatened when the new Congress is sworn in next month, while pessimism about the prospects for any agreement between Republicans and Democrats increased sharply.

Markets in Asia and US equities futures dropped sharply on the news. European shares also opened lower. S&P 500 stock futures fell 1.6 percent while Dow Jones stock futures and Nasdaq futures both lost 1.5 percent. At one point S&P 500 e-mini futures were down as much as 3.6 percent. If no budget deal will be reached by January 1, the US will be hit by $600bn of tax increases and spending cuts, leading the economy to a likely and serious recession.

The demise of the plan arrives after a week of optimism towards the chance of a bipartisan agreement to reduce the deficit. After making significant concessions on taxes and spending last weekend, Mr Obama and Mr Boehner failed to close the deal, and Mr Boehner decided to move ahead with a purely Republican proposal in order to exert more pressure on the President.

The plan backfired when some hawkish Republicans refused to raise taxes on incomes over $1m while maintaining current rates for all the taxpayers. If passed, it would have been the first vote by House Republicans for a tax increase in more than two decades.

“It is now clear that to protect the middle class from the fiscal cliff, speaker Boehner must allow a bill to pass with a combination of Democratic and Republican votes,” Mr Reid said. “Speaker Boehner’s partisan approach wasted an entire week and pushed middle-class families closer to the edge.” It is still unclear whether and how Mr Boehner will try to renegotiate the plan. Even if a deal is reached, final passage is highly unlikely to happen before the end of next week. Mr Reid said the Senate would not be sitting until Thursday, December 27.

President Obama wanted to raise taxes on families earning more than $400,000, a much lower threshold than Republicans’ $1m. Opinion polls show that more Americans would blame Republicans rather than Obama if they don’t reach a deal before the new year.

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