WASHINGTON (AP) — President Barack Obama made his first public comments Friday since the victory speech after his re-election, setting the tone for upcoming tense talks with congressional Republicans on avoiding the so-called “fiscal cliff” — a combination of deep spending cuts and the expiration of Bush-era tax cuts that will take effect Jan. 1 and threaten to pull the country back into recession.
Obama did not offer a specific plan for how to tackle the country’s economic problems during his brief comments, but he emphasized that raising taxes on the wealthiest Americans must be part of the deficit reduction plan.
“We can’t just cut our way to prosperity,” he said. “We have to combine spending cuts with revenue. That means asking the wealthiest Americans to pay a little more in taxes.”
Obama said his win in Tuesday’s election showed that a majority of Americans agree with his approach, and he reminded his audience that if no deal is struck with Congress, “everybody’s taxes will automatically go up on Jan 1. Everybody’s. … That makes no sense. That would be bad for the economy.”
The president also invited Congressional leaders of both parties to the White House next week for talks on how to avoid the fiscal cliff.
The one-two punch of spending cuts and expiring tax cuts will cost about $800 billion next year alone. For context, that’s the size of the $800 billion stimulus bill Obama signed soon after taking office the first time, four years ago.
Obama had been silent since his victory speech early Wednesday morning, but leading Republicans have filled the vacuum with promises to stand resolutely against any effort by the president to fulfill a campaign promise to raise tax rates on the country’s upper-income earners.
The landscape of U.S. politics has changed little after the most expensive election in the country’s history, with Obama still facing a divided Congress and Republicans seeking to topple the conventional wisdom that Obama has the upper hand in upcoming negotiations on averting the fiscal cliff.
Obama faces a tough decision: Does he pick a fight and risk a prolonged impasse with Republicans, or does he rush to compromise and risk alienating Democrats still celebrating his victory?
All sides say that they want a deal, and that now that the election is over, everyone can show more flexibility than in the heat of the campaign. Congress returns to work on Tuesday and faces about a month and a half of work before the holidays.
But Republicans warn that a fight could hurt efforts for future compromise in a bitterly divided Capitol and threaten his second-term agenda.
“Raising tax rates will slow down our ability to create the jobs that everyone says they want,” John Boehner, the speaker of the Republican-controlled House of Representatives, told a press conference Friday. He has warned that such a plan might not even pass the Senate, where Democrats hold control.
Boehner made it clear that Obama would have to make the first move. “This is an opportunity for the president to lead,” he said, repeating that idea several times in his 11-minute appearance.
A lot is at stake. A new Congressional Budget Office report on Thursday predicted that the economy would fall into recession if there is a protracted impasse in Washington and the government falls off the fiscal cliff for the entire year. Though most Capitol-watchers think that a long deadlock is unlikely, the analysts say such a scenario would cause a spike in the jobless rate to 9.1 percent by next fall. The rate is now at 7.9 percent.
Some analysts believe that the fiscal cliff is more like a fiscal slope and that the economy could weather a short-term expiration of the Bush-era tax cuts and the government could manage a wave of automatic spending cuts for a few weeks. But at a minimum, going over the fiscal cliff would rattle financial markets as the economy struggles to recover.
Markets have already slumped worldwide as investors have refocused on challenges to the world economy following Obama’s re-election.
The CBO analysis says the looming combination of automatic tax increases and spending cuts would cut the massive U.S. deficit by $503 billion through next September, but that the fiscal austerity would cause the economy to shrink by 0.5 percent next year and cost millions of jobs.
The new study estimates that the nation’s gross domestic product would grow by 2.2 percent next year if all Bush-era tax rates were extended and would expand by almost 3 percent if Obama’s 2-percentage-point payroll tax cut and current jobless benefits for the long-term unemployed were extended as well.
Obama’s long-held position — repeatedly rejected by Republicans — is that tax rates on family income over $250,000 should jump back up to Clinton-era levels.
Republicans say they’re willing to consider new tax revenue but only through drafting a new tax code that lowers rates and eliminates some deductions and wasteful tax breaks. And they’re insisting on cuts to federal aid programs like Medicare, Medicaid and food stamps.
The current assumption is that any agreement would be a multistep process that would begin this year with a down payment on the deficit and action to stave off more than the tax increases and $109 billion in across-the-board cuts to the Pentagon budget and a variety of domestic programs next year.
Many tough decisions would have to be made in the next six weeks. They could include the overall amount of deficit savings and achieving agreement on how much would come from revenue increases and how much would be cut from costly health care programs, the Pentagon and the day-to-day operating budgets of domestic Cabinet agencies.
Democrats are sure to press for a guarantee that tax reform doesn’t end up hurting middle-income taxpayers at the expense of upper-bracket earners. Republicans want to press for corporate tax reform and a guarantee that the top rate paid by individuals and small businesses goes down along the way.
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Associated Press writers Andrew Taylor, Nedra Pickler, Julie Pace, Martin Crutsinger, Ken Thomas and Pete Yost contributed to this report.
Copyright 2012 The Associated Press.