U.S. Fiscal Dispute Shows Sign of Thaw Before Deadline

Lawmakers returned to Washington today amid a potential thaw in the U.S. fiscal policy dispute, as President Barack Obama and House Speaker John Boehner attempt to make a deal to prevent spending cuts and tax increases from taking effect.

Obama sounded conciliatory notes at a Daimler AG plant in Michigan yesterday. In his first comments since meeting with Boehner Dec. 9 at the White House, the president didn’t repeat frequent complaints about Republicans holding tax cuts for most Americans “hostage” because they oppose higher rates for wealthiest, and said he was ready to come to an agreement. Since Boehner complained Dec. 7 that Obama had wasted a week, statements from the speaker’s office have been milder, too.

“There is a change in tone, obviously,” Julian Zelizer, professor of history and public affairs at Princeton University in New Jersey, said in an interview. After building public support for higher tax rates for the highest earners, he said, Obama is negotiating and “preparing his own party for a possible deal” by sending signals about his willingness to cut entitlement programs including Medicare and Medicaid.

Ryan, Cantor Work to Protect Boehner Plan from Tea Party

While the private talks continue between the administration and aides to Boehner, each side is insisting publicly that the other must give in first. The result is a prolonged wait for more than 500 members of Congress who aren’t talking with Obama and will have to decide if they can accept a deal that he and Boehner may ultimately reach.

Lawmakers Wait

“For all the president’s talk about the need for a balanced approach, the truth is he and his Democratic allies simply refuse to be pinned down on any spending cuts,” Senator Mitch McConnell, a Kentucky Republican, said today on the Senate floor. “The president seems to think if all he talks about are taxes, and that’s all reporters write about, somehow the rest of us will magically forget that government spending is completely out of control.”

Democratic lawmakers and Obama continue to insist that Republicans accept higher tax rates for top earners before they will propose spending cuts.

“Let’s get it done,” Obama said to workers at a plant owned by Daimler AG’s Detroit Diesel unit in Redford, Michigan. “I will work with the Republicans on a plan for economic growth, job creation and reducing our deficits.”

$600 Billion

If Congress doesn’t act, more than $600 billion in tax increases and spending cuts will start taking effect Jan. 1. Tax rates for income at all levels would rise, along with taxes on estates, capital gains and dividends.

If nothing changes, the stalemate probably would lead to a recession in the first half of 2013, according to the Congressional Budget Office. Obama and Boehner, an Ohio Republican, are trying to replace the immediate deficit reduction in the so-called fiscal cliff with more gradual tax and spending changes.

Obama spoke yesterday by telephone from Air Force One with Senate Majority Leader Harry Reid, a Nevada Democrat, according to a Senate Democratic aide who spoke on condition of anonymity because the talks were private. Obama met Dec. 7 with Representative Nancy Pelosi of California, the House Democratic leader.

U.S. stocks rose today, with the Standard & Poor’s 500 Index climbing 0.8 percent to 1,429.99 at 10:08 a.m. in New York. The Dow Jones Industrial Average gained 93.88 points, or 0.7 percent, to 13,263.76. Treasuries fell as the benchmark 10- year yield climbed four basis points, or 0.04 percentage point, to 1.65 percent at 9:56 a.m. New York time, according to Bloomberg Bond Trader data.

Rhetorical Space

Obama and Boehner have left rhetorical space for an agreement that would split the arithmetical difference between their opening offers.

That would suggest a deal with a top tax rate of 37 percent or 38 percent, between today’s 35 percent rate and the 39.6 percent that Obama has pushed for and that will return if Congress does nothing. An agreement in the middle could include about $1.2 trillion in additional revenue over the next decade and $1 trillion in spending cuts.

Representative Xavier Becerra, a California Democrat who is part of his party’s House leadership, said Boehner’s first step should be to relent and allow a vote in the chamber on a Senate- passed bill that would continue the tax cuts on annual income of individuals up to $200,000 and of married couples up to $250,000.

‘Have a Vote’

“Let my people go,” Becerra said yesterday at an event sponsored by Politico in Washington. “Let us have a vote.”

Some Republicans, including Senator Bob Corker of Tennessee, have endorsed such a move.

Democrats also insist that a broad agreement on spending cuts must address the $16.4 trillion debt ceiling. Congress will need to act as soon as mid-February to prevent the U.S. from defaulting, according to the Congressional Budget Office. After political bickering stalled negotiations over raising the debt limit last year, Standard & Poor’s lowered the U.S.’s credit rating to AA+ from AAA on Aug. 5, 2011.

Republicans have rejected Obama’s debt limit proposal, which would allow the president to request increases and effectively require a two-thirds majority in the House and Senate to prevent it.

Instead, House Republicans have reiterated their support for the “Boehner rule,” which requires spending cuts equal to the size of each debt limit increase.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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