The US needs to end its political gridlock in order to avert the so-called “fiscal cliff” that jeopardizes a “fragile” global recovery, Australian Treasurer Wayne Swan said.
“Without action by [US] Congress, the consequences would be very grave,” Swan said in an e-mailed weekly note yesterday. “The world cannot afford to see a continuation of the gridlock that has bedeviled the US political system in recent years.”
US President Barack Obama, claiming a mandate from voters after his re-election on Tuesday last week, faces opposition over his call for an immediate tax cut extension for people earning less than US$250,000 and insistence that top earners pay more.
The US faces US$1.2 trillion in mandated spending reductions and tax boosts over a decade starting on Jan. 1 should Congress fail to agree to reduce the US deficit, which was US$1.09 trillion this fiscal year.
Obama has offered no public concessions to US House of Representative Speaker John Boehner, who has cited public support for the re-elected House Republican majority for his stance of backing no increases in tax rates.
Obama and Boehner will meet at the White House on Thursday, along with House Democratic Leader Nancy Pelosi, US Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell.
Swan, who held talks with US Secretary of the Treasury Tim Geithner and US Federal Reserve Chairman Ben Bernanke in Washington last week, called for the Democrats and the Republicans to work together to avoid the cliff.
Obama wants to let tax cuts from the former US president George W. Bush era lapse on income of individuals above US$200,000 and of married couples above US$250,000. That would push the top tax rate to 39.6 percent from 35 percent.
The Senate, controlled by Democrats, and the House, controlled by Republicans, have each passed one-year extensions of their proposals. The policies favored by Democrats would lead to about US$58 billion in higher taxes on top earners.
Concern about the impact of a potential political stalemate over the fiscal cliff has already had an impact on global markets. On Saturday, the euro slid the most in four months versus the yen on concern the US budget showdown will push the world’s biggest economy into recession and Greece will struggle for more rescue funds.
The US Congressional Budget Office has said the US economy would slow by as much as 0.5 percent next year if Congress fails to reduce the deficit kicking in on Jan. 1.
While Australia, the world’s 12th-largest economy, has shown resilience to the global slowdown, Swan said the lack of a political compromise over the fiscal cliff would threaten all economies.
“The impact could stretch far beyond the US, striking a severe blow to the fragile global recovery,” he said.