Fiscal crisis crashes Obama's holiday

PRESIDENT Barack Obama was planning to cut short his Christmas holiday and return to Washington to make a late push to resolve the looming fiscal cliff that could push the US economy back into recession.

PRESIDENT Barack Obama was planning to cut short his Christmas holiday and return to Washington to make a late push to resolve the looming fiscal cliff that could push the US economy back into recession.

A White House official said Mr Obama could leave Hawaii as early as Boxing Day.

Meanwhile, both chambers of the US Congress will come back from their holiday break on Thursday and return to work.

While there are growing signs that some members of both parties are prepared to accept a deal that raises taxes on high earners, there remains considerable distance between Republicans and Democrats and no guarantee that an agreement could pass.

The President and members of Congress left Washington last week after House Republicans rejected a plan that would have left tax rates in place for all but those with incomes above $US1 million.

Mr Obama has since called for a less ambitious approach to avoid the fiscal cliff on January 1, when a series of automatic budget cuts and tax increases will come into effect if Congress and the White House cannot come up with an alternative course of action.

The White House has been seeking a resolution through talks with Senate Democrats, who control the chamber and have gained the tacit support of some of their Republican colleagues. But Senate Republican leader Mitch McConnell has given no indication that his members would not seek to block a deal that includes tax increases.

The main obstacle remains the Republican-led House, where a bloc of conservatives has ruled out any tax increases whatsoever.

Over the past four days, Mr Obama has had a placid break of golfing, hiking and exercising on a military base on the island of Oahu, where he was raised and usually spends the holidays.

He had a quiet Christmas Day with his family, spending most of the morning and early afternoon at the beach house he is renting.

It was likely to be his last day of solitude for a while. With a fiscal deal still out of reach, he can ill afford the PR disaster that would arise from being on holidays while the country heads towards a deadline that could have a serious impact on the financial markets and the economy.

Quick action by the President and Congress could still help the economy escape the full impact of the fiscal cliff. But economists warn the consequences could be severe if the deadlock in Washington persists much longer than a few weeks.

Wall Street is still betting on a quick deal, but that confidence was misplaced, said Julia Coronado, chief North American economist at BNP Paribas.

"Markets have been incredibly complacent about this," she said. If a compromise cannot be found by January 1, "the markets will take that hard".

Some hits - such as a 2-percentage-point increase in payroll taxes and the end of unemployment benefits for more than 2 million jobless Americans - would be felt right away.

But other effects, like tens of billions in automatic spending cuts, to include both military and other programs, would be spread out between now and the end of fiscal 2013 in September. These could quickly be reversed if a compromise is found.

The Congressional Budget Office predicts that if the impasse lasted even longer and the full force of more than $US500 billion in tax increases and spending cuts hit the economy, the country would slip into recession in the first half of 2013, with unemployment rising to 9.1 per cent by the fourth quarter.

But for all the pessimism recently, most observers still think a compromise will be reached, even if it takes a few more weeks.

Michelle Meyer, senior economist at Bank of America Merrill Lynch, said there was a 40 per cent chance of what she called a "bungee-jump over the fiscal cliff", with Congress failing to act until after January 1 but eventually averting the full package of tax increases and spending cuts by mid-January.

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