While you were sleeping: Republican infighting as plan rejected

Wednesday 5th December 2012

US House Speaker John Boehner tabled a plan to avert the fiscal cliff that left out tax increases for the wealthy and was rejected within an hour by the Whitehouse The plan also highlighted divisions among factions of the Republican Party.

Boehner's plan partly entails targeting US$800 billion in revenue over a decade from overhauling the tax code, closing loopholes and deductions.

Republican Senator Jim DeMint of South Carolina was one of the loudest dissenters.

"Speaker Boehner's $800 billion tax hike will destroy American jobs and allow politicians in Washington to spend even more," DeMint said in a statement.

The comments may signal a repeat of the tactics of the so-called Tea Party faction within the GOP that stalled talks on lifting the federal debt ceiling last year and ultimately led to a credit rating downgrade.

The schism could be overstated though Reuters reported the Republican leadership is trying to bring the Tea Party into line, removing what it called Tea Party stalwarts Tim Huelskamp and Justin Amash from the budget committee. Huelskamp reportedly called it "a vindictive move."

Conservative think tanks also balked at the proposal, which the Heritage Foundation called "utterly unacceptable."

The deadline for averting the fiscal cliff, some US$607 billion of tax increases and spending cuts that kick in on Jan. 1, is edging closer. Allowing the automatic cuts and tax hikes risks plunging the world's biggest economy back into recession and driving the jobless rate, now 7.9 percent, sharply higher through 2013, economists say.

President Barack Obama called Boehner's plan, which includes US$2.2 trillion in new revenue and spending cuts, "out of balance" in an interview with Bloomberg TV.

Yet it may yet signal progress as Obama said he was willing to accept cuts to entitlements and realises he won't get all that he wants in negotiations. It's now down to the Whitehouse to counter-offer.

Stocks on Wall Street fell in late trading. The Dow Jones Industrial Average was down 0.2 percent and the Standard & Poor's 500 Index declined 0.3 percent. The tech-laden Nasdaq Composite fell 0.5 percent.

The threat of the US economy being derailed by Washington intransigence looms as figures this week showed manufacturing has weakened.

The Institute for Supply Management's index of national factory activity fell to 49.5 last month, from 51.7 in October on a scale where 50 marks the difference between contraction and expansion. November's reading was the lowest in more than three years.

Investors doubt lawmakers will manage to fix what's wrong with the US economy any time soon.

Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co, said in a report on Pimco's website that the next four years "will likely face structural economic headwinds that will frustrate the American public."

Most of the developed world may be facing real growth of 2 percent or less "over the foreseeable future".

"Investors should expect future annualized bond returns of 3-4% at best and equity returns only a few percentage points higher," he wrote in his December column. His picks were commodities such as oil and gold, US inflation-protected bonds, high-quality municipal bonds and non-dollar emerging-market stocks.

Gold futures have fallen to a four-week low in the face of Washington's stalemate, with spot gold recently at US$1,693.56 an ounce. Crude oil has also weakened, with Brent crude trading at US$110.85 a barrel.

The euro recently traded at $1.3095 and earlier traded as high as $1.3107, the highest in almost five weeks. The common currency has benefited from Greece's plan to buy back some of its debt, which has lifted hopes that Europe is managing to navigate through its debt morass and stalled economy.

BusinessDesk.co.nz

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