US heads
towards fiscal cliff as Obama 
flies home

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President Barack Obama cut short his holiday and returned to Washington yesterday as a senior Democrat warned that the US appeared to be heading over the year-end “fiscal cliff” of higher taxes and deep spending cuts that could spin the still-fragile economy back into a recession.

The Treasury Secretary warned that the government would hit its borrowing limit on Monday, the final day of the year.

Mr Obama made phone calls to congressional leaders before leaving his Hawaiian holiday for Washington, the White House said.

The US appears to be headed over the fiscal cliff, warned Senate Democratic Leader Harry Reid who criticised his counterpart in the House of Representatives, Speaker John Boehner, for not calling House members back to work: “They are not here.”

He said Mr Boehner cared more about keeping his position when the new Congress comes in on January 3.

Consumer confidence fell to its lowest monthly level since August, largely on concerns over the fiscal cliff, the Conference Board reported. Stocks were falling on Wall Street at midday.

Treasury Secretary Timothy Geithner told Congress on Wednesday he would take “extraordinary measures as authorised by law” to postpone a government default. But he said uncertainty over the outcome of the fiscal cliff negotiations made it difficult to determine how much time those measures would buy.

Congress was not expected to return until today. In recent days, Mr Obama’s aides have been consulting with Mr Reid’s office, but Republicans have not been part of the discussions, suggesting that much still needs to be done before Congress can pass a deal, even a small one, by Monday.

At stake are tax cuts that expire on December 31 and revert to the higher rates in place during the administration of President Bill Clinton in the 1990s.

That means 536 billion dollars (£333bn) in tax increases that would affect nearly all Americans. In addition, the military and other federal departments would have to cut 110 billion dollars (£68bn) in spending.

The changes are part of a long-delayed need for the government to address its chronic deficit spending.

While economists have warned about the impact of such a massive and abrupt shift, both the Mr Obama administration and Congress appear to be proceeding as if they have more than just four days left.

Congress could still act in January in time to retroactively counter the effect on most taxpayers and government agencies, but chances for a large deficit reduction package would likely be put off.

Mr Geithner’s news on the government about to hit its 16.4 trillion dollars (£10.2 trillion) borrowing limit has brought more pressure to the process. Mr Obama wants an increase in the borrowing limit as part of any agreement to avoid the fiscal cliff, but Republicans want concessions in return.

Only Congress can raise the limit on the amount of debt the US can accumulate.

In August 2011, the rating agency Standard & Poor’s stripped the government of its prized AAA bond rating because it feared that America’s dysfunctional political system couldn’t deliver credible plans to reduce the federal government’s debt and meet its debt obligations.