What Obama's win means for fiscal cliff

Fiscal cliff starts to take effect in January

WASHINGTON -  

With the elections out of the way, the time to actually govern has arrived. And the pending fiscal cliff will test everyone's mettle.

The fiscal cliff is the legislative equivalent of a slow-motion train wreck that Congress and President Obama can avoid ... but only if they work together.

Some seasoned Washington observers think they will do just that, despite their troubled history, because they don't want to be blamed for what happens if they fail.

But others say there's a good chance they won't because the election did nothing to ease the partisan chasm over taxes. They argue that only a market crash or a crisis over the country's debt ceiling will force their hand.

The fiscal cliff -- which starts to take effect in January -- includes $7 trillion worth of tax increases and spending cuts over a decade. In addition, the debt ceiling will need to be raised by early next year.

Among the fiscal cliff policies at issue: reductions in both defense and non-defense spending; the expiration of the Bush tax cuts; the end of a payroll tax holiday and extended unemployment benefits; and the onset of reimbursement cuts to Medicare doctors.

Lawmakers must choose whether to leave those measures in place, replace some or all of them, postpone them or cancel them entirely. Their decision will affect the economy, the country's credit rating and the U.S. debt burden.

"(F)ailure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 2013," Fitch Ratings warned on Wednesday.

If left in place, the fiscal cliff would lead to the biggest single-year drop in the annual deficit as a percent of the economy since 1969.

But because it would be so abrupt and arbitrary, it also could throw the United States back into a recession next year, when more than $500 billion will be taken out of the economy.

Tax hike on the rich is key: Like many Democrats and Republicans, the president doesn't like the automatic, across-the-board spending cuts called for under the so-called sequester. He wants them replaced.

But the White House has indicated Obama won't accept a package that just reverses the defense cuts, as the Republicans want. And senior administration officials said recently that Obama would veto any fiscal cliff package that extends the Bush tax cuts for top earners, a key Republican demand.

The president himself hasn't used the word "veto." Instead, he has urged Congress to "work on those things we can agree on" -- namely, to extend the Bush tax cuts for the majority of Americans.

Meanwhile, on Tuesday night, House Speaker John Boehner said the fact that the GOP retained control of the House means "there is no mandate for raising tax rates." He later added in a tweet, "If there's a mandate, it's for parties to work together to help our economy grow."

In an interview with the Des Moines Register before his re-election, Obama expressed confidence that a "grand bargain" on debt reduction could occur within six months of his second term.

Indeed, some expect that Obama will put out a new debt-reduction proposal soon after the elections, said Steve Bell, the economic policy director of the Bipartisan Policy Center.

But lawmakers and policy experts also say the most they expect to happen before the end of the year will be for Congress to pass a "bridge" or "framework" package that tees-up the next Congress to do the heavy lifting.

No easy way out: Congressional scholar Norman Ornstein sees one of three outcomes. In one, 70 senators and major business leaders lock arms on a framework deal that includes raising revenue for deficit reduction. Obama endorses it and pressures the House to at least vote on it.

Such a framework might mean lawmakers postpone fiscal cliff measures for several months, and agree to strike a large deficit-reduction deal by a date certain next year according to agreed-upon targets for spending and revenue.

Another possibility, Ornstein said, is that Obama meets resistance from House Republicans. So he takes a hard line and lets the country go over the cliff, only to introduce on Jan. 1 what he'd characterize as one of the biggest tax cuts in American history -- for everyone except the top 1 percent.

A third option, Ornstein suggested, is that everybody agrees to postpone the fiscal cliff until March, to give more time to work out a deal, and to keep the economy from slipping into recession in January.

"Any of these could happen, none are ideal," Ornstein said. "One wild card, of course, is the reaction of the markets."

--CNN Senior Congressional Producer Deirdre Walsh contributed to this report.


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