Wall Street Down as Fiscal Impasse Drags On

After the market closed, futures indicated continued pressure after Fitch Ratings placed the United States' 'AAA' rating on rating watch negative, citing the debt ceiling gridlock.

"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default," the rating agency wrote in a statement.

The move echoed a similar action by Standard & Poor's in August 2011, when the agency downgraded the U.S. credit rating because of political gridlock related to the debt ceiling.

Futures fell, with S&P 500 futures down 10.7 points, Dow Jones industrial average futures off 122 points and Nasdaq 100 futures down 7.5 points.

"The last time this sort of thing happened, the practical effect on markets wasn't significant. But this time, I don't know what the impact could be," said John Carey, portfolio manager at Pioneer Investment Management in Boston, which has about $200 billion in assets under management.

"At some point this will really start to matter, and if nothing else, it highlights the concern people have about the budgetary situation. It lets investors know that this kind of risk is on the horizon."

During Tuesday's session, traders held off making big bets given the political uncertainty, which overshadowed some key corporate earnings. Selling accelerated during the afternoon after Senator Richard Durbin said Senate negotiations had been suspended until House Speaker John Boehner can work out a fiscal plan that can proceed in the House of Representatives.

Losses were broad, with all 10 S&P 500 sectors falling on the day. Three-fourths of stocks traded on the New York Stock Exchange ended lower, while 68 percent of Nasdaq-listed shares fell.

The Dow Jones industrial average ended down 133.25 points, or 0.87 percent, at 15,168.01. The Standard & Poor's 500 Index was down 12.08 points, or 0.71 percent, at 1,698.06. The Nasdaq Composite Index was down 21.26 points, or 0.56 percent, at 3,794.01.

Despite the day's decline, the S&P remains above its key moving averages, which have been serving as support. The index is currently about 0.6 percent above its 14-day moving average.

Lawmakers have until October 17 to agree to extend the $16.7 trillion U.S. borrowing limit or the country will risk an unprecedented debt default. The White House and Senate rejected the House's latest offer, while Republican leaders also failed to get support for the plan from rank and file members within their party.

Markets have largely avoided steep losses on optimism that lawmakers would agree to end the partial government shutdown and raise the debt ceiling. At the same time, volatility has spiked as the deadline approaches with little obvious progress. The CBOE Volatility index jumped 16 percent and is up more than 40 percent over the past four weeks.

"The odds that there won't be a deal over the next month are near zero, but there is some chance we won't see something by the 17th. If that happens ... we could easily correct 3-5 percent," said Jim McDonald, who helps oversee $803 billion as chief investment strategist at Chicago-based Northern Trust Global Investments.

"While the market has climbed over the past two weeks," he added, "that would reverse if there was any real concern" about missing the deadline.

Among other assets, crude oil fell 1.5 percent, while gold, which is viewed as a safe haven, rose 0.7 percent.

The situation in Washington has driven trading lately, overshadowing the beginning of a busy week of earnings. Citigroup Inc reported weaker-than-expected results as the bank was hit by a double-digit drop in bond trading revenue for the quarter, sending its shares down 1.5 percent to $48.86.

Johnson & Johnson reported stronger-than-expected quarterly results on strong growth for its prescription drugs, while Coca-Cola Co reported revenue slightly under expectations.

J&J rose 0.1 percent to $89.93 while Coca-Cola fell 0.7 percent to $37.66. Both companies are Dow components.

Intel Corp shares reversed early gains and fell 0.9 percent after the market closed after it reported revenue that topped expectations. Yahoo Inc also lost its initial post-market gains, trading flat after its results, while CSX Corp held on to slight after-hour gains.

Shares of Teradata Corp fell 18.4 percent to $42.91, a day after the data analytics firm cut its full-year earnings forecast.

With 7 percent of S&P 500 companies having reported, 52.8 percent have reported profits that topped expectations, according to Thomson Reuters data, below the historical average of 63 percent. There have also been fewer companies beating revenue forecasts this quarter.

FedEx, the world's No. 2 package carrier, authorized a share repurchase program of up to 32 million of its outstanding shares of common stock, sending its shares up 4.1 percent to $120.08.

On the downside, J.C. Penney Co Inc sank 8.9 percent to $7.17 as a company spokesperson denied a market rumor that the department store chain had hired bankruptcy counsel. The stock has fallen 63 percent so far this year.

Data showed the pace of growth in New York state's manufacturing sector slipped this month to its slowest since May, but business optimism stayed strong.

(Editing by Nick Zieminski and Dan Grebler)

Economix Blog: The Fiscal Side of Fighting Terror

Surpluses Help, but Fiscal Woes for States Go On

And some of the surpluses that are materializing, as welcome as they are, are not as robust as they appear at first glance — especially as bills come due for some of the costs that states put off during the long economic downturn.

When Texas lawmakers went into session in January, they were met with some good news: the state was projecting an $8.8 billion surplus when its two-year budget cycle ends in August. But it turned out that much of that extra money was already spoken for: more than half of it had to be used to pay Medicaid costs the state had delayed paying earlier.

And Texas, like many states, has not been fully funding its pensions. Last year the state contributed just 49.2 percent of what actuaries said was needed by the state workers’ pension fund. Eventually the remaining money, around $358 million, will still have to be put into the fund, along with the 8 percent investment return the fund is supposed to earn each year.

In Hawaii, Gov. Neil Abercrombie, a Democrat, recently opened his re-election campaign by noting that the $200 million deficit he inherited upon taking office has been transformed into a positive balance of $300 million. But Hawaii faces enormous looming bills: its pension system currently has less than 60 cents of every dollar it has promised retirees, and it is more than $13 billion short of what it will need to pay for the health coverage it has promised its retired workers.

And California, which faced a $26 billion deficit two years ago, expects a surplus of between $1.2 billion and $4.4 billion this year, thanks to a combination of tax increases, budget cuts and an improving economy. But it could be erased if the state were to adequately finance its teachers’ pension fund, which says it will need an additional $4.5 billion a year, much of it from the state, to pay the benefits it promised.

“The problems are still there,” said Richard Ravitch, a former lieutenant governor of New York who formed a State Budget Crisis Task Force last year to focus attention on the long-term problems facing states. “It’s retirement expenses, generally, and health care expenses — and they’re crowding out other things.”

Of course, surpluses are better than deficits. When the fiscal crisis hit states full force in 2009, 41 states were forced to make disruptive midyear budget cuts, according to a survey by the National Governors Association and the National Association of State Budget Officers. This year, only a handful did — and most states are expected to end the year with surpluses, or with money to replenish their depleted rainy-day funds.

But many challenges loom, as they have since before the recession. A 2007 study by the Government Accountability Office was titled “State and Local Governments: Persistent Fiscal Challenges Will Likely Emerge Within the Next Decade.” This spring the office warned that the continuing near-term and long-term state and local government challenges “add to the nation’s overall challenges,” noting that the problem was largely driven by rising health care costs.

And some states are still in considerable fiscal distress. Illinois, which still faces large backlogs of unpaid bills, the weakest pension system of any state and the lowest credit rating of any state, failed to approve an overhaul of its pension system this week. As time was running out in its state legislative session, some leaders in the Democrat-controlled Capitol were pleading for a last-ditch plan to address the state’s pension crisis. The system was in bad shape even before the financial crisis of 2008 struck, and now it requires an ever-bigger slice of the state budget every year to meet its promises.

Donald J. Boyd, a senior fellow at the Nelson A. Rockefeller Institute of Government, in Albany, said states still face enormous costs to pay for the obligations they have made. “I know a lot of people are pinning their hopes and mantras on the idea that an improved stock market will bail pension funds out, but it will take so much more than we have seen — and the risk to governments, if it goes wrong, is frightening,” he said.

In some states the surpluses may reflect an improving economy, but in many they are the result of the tough steps taken during the downturn, which included making deep cuts to services; furloughing, laying off and reducing the benefits of workers; delaying repairs to roads and bridges; and raising taxes.

To some extent, said Scott D. Pattison, the executive director of the budget officers’ group, the current surpluses are a reflection of the way that the states’ annual revenue forecasts grew more conservative during the downturn and slow recovery. “It’s more a function of there being more money than they thought there would be,” he said, “and not a signal that their financial challenges are over.”

Now the surpluses have spurred debate in statehouses around the county, with some officials seeking to restore services and rehire workers, and others pushing new tax cuts. Governors from both parties, though, find themselves urging restraint as their states climb back from the recession.

Barry Anderson, the deputy director of the National Governors Association, used a homespun analogy for the situation that many states find themselves in. “I can see Mom and Dad at the kitchen table,” he said, “saying: ‘Wow, we did a little better than we anticipated here — but let’s not go out and blow it all, let’s set it aside. Because we know, not only do we need a new car, or to take care of the leaks in the basement, but Johnny and Joanie are going to need insurance coverage.’ ”

Rising health care costs continue to pose one of the biggest challenges to states, and the trend has many governors concerned.

Although the rate of Medicaid cost increases has slowed, Mr. Anderson said, those costs have continued to rise — and enrollments have risen as well, driving up expenses for many states. Medicaid was the biggest single component of total state spending this year, the most recent survey of states found: states were planning to spend 23.9 percent of their money on Medicaid — more than the 19.8 percent they were planning to spend on primary and secondary education, and more than what they planned to spend on higher education and transportation combined. Many states put off needed road maintenance during the downturn.

There are other threats on the horizon as well. Both Mr. Anderson and Mr. Pattison cautioned that some of the better-than-expected tax collections that many states experienced this year could be a one-time fluke: a higher-than-usual number of taxpayers apparently sold investments at the end of 2012 as Congress debated what to do about the so-called fiscal cliff, fearing the prospect of higher tax rates.

“We’re advising states to consider identifying money that is the result of one-time-only activity,” Mr. Pattison said, “and then try to avoid putting that into ongoing operating expenses.”

Monica Davey contributed reporting.

House Takes On Fiscal Cliff

Lawmakers said that Representative Eric Cantor of Virginia, the No. 2 Republican, indicated to his colleagues in a closed-door meeting in the basement of the Capitol that he could not support the legislation in its current form. Many other Republicans were voicing stiff objections to a plan that they saw as raising taxes while doing little to rein in spending. Several conservatives assailed it on the House floor as the chamber convened at noon for an unusual New Year’s Day session.

“There’s not a lot of support for the bill as is. I personally hate it,” said Representative John Campbell, Republican of California. “The speaker, the day after the election, said we would give on taxes, and we have, but we wanted spending cuts. This bill has spending increases. Are you kidding me?”

Aides said that Speaker John A. Boehner, who had pledged to put any measure the Senate passed on the House floor for a vote, was mainly listening to the complaints of his rank and file and had not taken a firm position on the legislation, though he had clear reservations.

The situation loomed as a significant test for Mr. Boehner, who had been unable to pass his own proposal to increase taxes only on $1 million in income and above. He has said repeatedly that he would allow a vote on the Senate bill, but he has also said he did not want to pass a bill with predominantly Democratic votes. Public opposition from Mr. Cantor, who has up to this point sided with Mr. Boehner in the fiscal fight, would also complicate his position.

Brendan Buck, a spokesman for Mr. Boehner, said that during the meeting, “the lack of spending cuts in the Senate bill was a universal concern amongst members.” The Republican leadership expected to continue discussions Tuesday “on the path forward,” he added.

The 112th Congress comes to a close Thursday.

Democrats emerged from their own closed-door meeting with Vice President Joseph R. Biden Jr. generally sanguine about the deal, if not ecstatic. Few Democrats, if any, suggested a Democratic rebellion was in the works after a forceful — and lengthy — presentation by Mr. Biden, which walked them step by step through the negotiations, the legislation and the path forward on future deficit confrontations.

“It is clear that the vice president and the president are convinced that they have done the right thing. They don’t see it as a perfect deal though, and nobody else does,” said Representative Elijah Cummings, Democrat of Maryland.

It appeared that members were favoring trying to amend the measure and send it back to the Senate.

“I would be shocked if this bill doesn’t go back to the Senate,” said Representative Spencer Bachus, Republican of Alabama.

With just two days to go before a new Congress convenes, the House has essentially three choices: reject the bill, pass it as written by the Senate after what is certain to be a robust, even rancorous debate, or amend the bill and quickly return it across the rotunda to the Senate. Should the House choose to amend the measure, it would almost certainly imperil its chances of becoming law before the new Congress convenes. The Senate compromise, which enjoyed wide bipartisan support, was so hard fought and senators do not anticipate taking another vote on it.

Any failure to pass the measure before the 112th Congress ends as of noon Thursday would require the process to start over in the new 113th Congress, meaning the Senate would have to vote again with a changed membership due the departure of several veteran lawmakers and the arrival of newcomers from both parties as a result of victories in the November elections.

But the strong, bipartisan 89-to-8 vote in the Senate about 2 a.m. on Tuesday will put strong pressure on the House to approve the legislation since a defeat would essentially leave the House responsible for a steep series of tax increases and spending cuts that some economists warn could send the nation back into a recession.

Yet it was clear Tuesday morning that many House Republicans were disenchanted with the plan, which, while containing many concessions that angered Democrats, still favors the latter party’s priorities and imposes a tax increase on the wealthiest Americans.

“I am halfway through reading it and haven’t found the cuts yet,” said Representative Trey Gowdy of South Carolina, who generally votes against budget bills. “It’s part medicinal, part panacea, and part treating the symptoms but not the underlying pathology.”

Democrats have their own issues with the measure because of what they see as too many concessions on taxes, making it apparent some combination of Democrats and Republicans will have to come together behind the measure if it is to clear the House and be sent to President Obama for his signature.

Markets Jump on Fiscal Deal

The benchmark Standard & Poor’s 500 index finished Wednesday up 2.5 percent. The technology-heavy Nasdaq composite index was up even more strongly, rising 3.1 percent. The Dow Jones industrial average rose 2.4 percent, or about 308 points.

The major indexes ended the day within striking distance of the highs they reached before the election.

The drama over the fiscal impasse ended when a sufficient number of Republicans in the House joined Democrats to back a deal the Senate had reached earlier. The deal modestly raises income taxes on the highest-earning Americans, ends payroll tax cuts and creates permanent tax cuts for others.

“You’ve just removed a huge worry from the market,” said Jonathan Samson, the chief investment officer at Samson Capital Advisors.

Congress signed off on the deal late Tuesday night and it immediately sent stocks soaring first in Asia and then in Europe. Leading indexes rose 2.6 percent in France, 2.2 percent in Germany and 2.9 percent in Hong Kong. Markets in Japan and mainland China were closed for holidays.

In the United States, share prices experienced most of their increases in the first 30 minutes of the day and then plateaued for most of the rest of the day. In the bond market, investors sold off the longer-dated Treasuries that have been used as safe havens in recent years, pushing up the yield on the benchmark 10-year bond to 1.839 percent.

Many market strategists were already shifting their attention to the political sticking points that were not handled in this week’s agreement. Congress decided to defer for two months $110 billion of government budget cuts that were supposed to begin on Tuesday. Those cuts will have to be dealt with around the same time the government hits the so-called debt ceiling, beyond which it may not be able to borrow more money in the bond markets.

“There’s a recognition that this isn’t the end of the game,” said Jack Malvey, the chief market strategist at BNY Mellon.

In economic reports, the Institute for Supply Management said manufacturing in the United States expanded slightly in December. Its manufacturing activity index rose to 50.7 points in December, up from 49.5 in November.

In Europe, manufacturing activity remained in the doldrums. Surveys of purchasing managers by Markit Economics showed euro zone factories ended 2012 in poor shape, with both production and new orders declining in December. German factories posted declines in both output and new orders, according to the Markit data, while the Spanish manufacturing shrank a 20th consecutive month, with both the decline and the pace of job cuts accelerating.

Shares End Higher on Hope for Fiscal Deal

Traders hung on every word out of Washington on Monday, sending share prices on a jerky path upward on what is usually a quiet day of trading ahead of the New Year’s Day holiday.

It ended up being the best day for American stocks since the middle of November and was enough to push leading indexes into positive territory for December. The Standard & Poor’s 500-stock index finished the day up 1.7 percent, bringing the year’s gains to 13.4 percent. The Dow Jones industrial average was up 1.3 percent for the day and 7.3 percent for 2012.

The government was expected to go over the so-called fiscal cliff on Monday night, when a package of tax increases and spending cuts was set to start being phased in. But the political signals out of Washington convinced many investors that the White House and Congress would avert the changes that would be most damaging to the economy. “By day’s end, the assumption was that a deal was in hand — minor details needed to be worked out, but a finished product would be in the books within the next few days,” said Daniel Greenhaus, chief global strategist at BTIG. “Investors that had spent the last couple of days trading down reversed that trend and took things higher.” 

The market’s jump, much of which occurred after an early-afternoon news conference by President Obama, brought an unexpected end to a day that began with continuing bickering in Washington and a sense of foreboding on Wall Street. American stocks had fallen steadily for most of the last week and opened the day trading down.

Senator Mitch McConnell of Kentucky, the leader of the Republican minority, said late in the day that an agreement was “very, very close.”

Stocks could easily lose their gains if either chamber of Congress is unable to pass the compromise that was being negotiated on Monday. Senators said they were hoping to agree upon legislation and pass it along to the House for a vote on Tuesday. Some details of the agreement were still unclear, and the Republican-controlled House could demand changes.

The stock markets are closed on Tuesday, and most traders will be back at their desk Wednesday morning after a week of vacations and light trading.

Even if there is an agreement, it is unlikely to resolve a separate debate over the limit on the amount the government can borrow. The government hit its self-imposed debt ceiling on Monday, and Treasury Department officials have said they will be able to finance the budget for only a few weeks using emergency measures.

Some Republicans have said they want to use the debate over the debt ceiling to extract more spending cuts from Democrats. Investors are preparing for another bout of volatile trading if that happens.

The year did end with many market strategists in an optimistic mood about the American economy, once the fiscal negotiations in Washington are out of the way.

“While fiscal policy and political gridlock are negatives, there are other factors that remain supportive of growth, including a modest recovery in housing and further improvements in household balance sheets,” BlackRock’s chief investment strategist, Russ Koesterich, said in a note to clients.

The Standard & Poor’s 500 index climbed 1.7 percent, or 23.76 points to 1,426.19. The Dow Jones industrial average was up 1.3 percent, or 166.03 points to 13,104.14. The Nasdaq composite index rose 2 percent, or 59.20 points, to 3,019.51.

Fiscal Cutoff Gradually Morphs Into a Horizon

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Economic Scene: Say Goodbye to the Government, Under Either Fiscal Plan

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Fiscal Cliff Uncertainty Creates Flood of Work for Attorneys

By Matthew Huisman All Articles 

The National Law Journal

December 18, 2012

The uncertainty of the "fiscal cliff" negotiations in Washington has resulted in a recent flood of activity for attorneys as their clients try and plan for the future.

"This year is almost the perfect storm," said Miller & Chevalier tax member Marc Gerson, former majority tax counsel to the House Ways and Means Committee. He pointed to not only the fiscal cliff and the expiring Bush-era tax cuts, but also the increase in Medicare taxes and a new investment tax.

As a result, businesses are looking to accelerate income before the year ends to avoid the uncertainty of 2013.

"Traditionally there always is year-end tax planning that we do on behalf of our clients," Gerson said. "Obviously folks are operating with a lot of uncertainty."

The uncertainty has created the question of what to do before the end of the year, as attorneys present their clients with different scenarios to better prepare them for the future.

"I think it's negatively impacting businesses and the stock market," said McDermott Will & Emery partner Henry Christensen III in New York, leader of the firm's national and international private client practice. "If you don't know, then you have to plan for the worst."

Christensen said that attorneys have been working around the clock and on the weekends to help their clients finish transactions before the year's end.

He said that there are about 100 transactions that must close before the end of the year in the New York office and another couple hundred in the firm's Chicago office. Christensen said that trust transactions and charitable contribution planning are two areas where the firm has been swamped. But attorneys are still waiting to see what will come out of Washington.

Christensen said that the lack of guidance on state income tax reduction has been disruptive for businesses. He pointed to two companies that are planning to move from New York to Florida as a result of income tax reduction. He said states like New York, Illinois, Michigan, California and Pennsylvania may lose out to states like Texas, Florida and New Hampshire when it comes to attracting businesses.

"My sense is that Congress is not paying a great deal of attention to the estate and gift tax, but what they're really focused on is the personal income tax," Christensen said. "Lawyers will be busy, but their clients will not be happy with Congress for making them do all these things."

On Capitol Hill, Fiscal Talks Now Turn to U.S. Borrowing Limit

According to the Treasury Department, the government is about $66 billion below its $16.4 trillion debt ceiling, a legal borrowing limit that is set and periodically raised by Congress. When the country hits the ceiling — sometime toward the end of December, analysts estimate — it would start a countdown clock that would end with Washington running out of money to pay its bills.

That event might hobble the government, ruin the country’s credit and send markets into an outright panic, analysts predict. But despite — or because of — the debt ceiling’s potential to disrupt the economy, members of Congress are refusing to raise it as a matter of course, instead using it as a potent political football to extract concessions from the other side.

“I will not raise the debt ceiling ever again until we get significant entitlement reforms, because if we don’t reform entitlements, we’re going to become Greece,” Senator Lindsey Graham, Republican of South Carolina, said on CNN this week. If President Obama “doesn’t lead, there’s going to be one hell of a fight over raising the debt ceiling.”

The White House has pushed back by warning Republicans away from the ceiling in strong terms. “We cannot play this game, because while it might be satisfying to those with highly partisan and ideological agendas, it’s not satisfying to the American people and is punishing to the American economy,” said Jay Carney, the White House spokesman, this week. “We cannot do it.”

Some Democrats have in recent weeks urged the White House to mount a legal challenge to the ceiling itself. The White House has ruled out such measures. But in its initial proposal to avert the worst of the year-end tax increases and spending cuts, the so-called fiscal cliff, the Obama administration asked Congress to grant it more authority over the ceiling.

The White House’s plan — based on a proposal initially made by Senator Mitch McConnell of Kentucky, the Republican leader — would allow it to request an increase to the debt limit. Congress could pass a resolution blocking the increase, though such a resolution could be killed with a presidential veto.

Republicans immediately rejected the proposal. But it stems from the Obama administration’s deep frustration with Capitol Hill’s use of the ceiling as a source of political leverage, both last year and this year.

Mr. Boehner and Mr. Obama tried and failed to strike a long-term debt package before raising the debt ceiling, but not before scaring the markets and leading to the first-ever downgrade of the country’s credit rating.

This time, the ceiling is complicating the renewed negotiations on a long-term debt deal. Republicans are considering a plan to preserve the tax cuts on income up to $250,000 that Mr. Obama has requested, and then in the new year refuse to raise the debt ceiling unless the Obama administration concedes to cost reductions for Social Security, Medicaid and Medicare and possibly other programs.

When the country hits the ceiling, the Treasury would stop issuing new debt and start a series of “extraordinary measures,” technical maneuvers to leave it with enough money to pay all its obligations. But such extraordinary measures would buy the government only about six to 10 weeks, analysts estimate.

Eventually, its spending obligations would overwhelm incoming receipts, and the government would not be able to pay its bills. That would leave the Treasury in the position of choosing whether to pay bondholders or soldiers, the elderly or states.

Last summer, “Treasury considered asset sales; imposing across-the-board payment reductions; various ways of attempting to prioritize payments; and various ways of delaying payments,” a department report said. “Treasury reached the same conclusion that other administrations had reached about these options — none of them could reasonably protect the full faith and credit of the U.S., the American economy, or individual citizens from very serious harm.”

Knowing exactly when the Treasury would reach that point is an exercise in guesswork. The Bipartisan Policy Center estimates the date would fall sometime in February.

If Congress failed to address any of the year-end spending cuts or tax increases, the government’s revenue would rise and spending obligations would fall. But analysts say they do not think that would delay the need to raise the debt ceiling for more than a few days.

“I’ve been here in 40 years this coming January, and I have never seen this many consequential spending and tax problems descend at the same time,” said Steve Bell, senior director of economic policy at the Bipartisan Policy Center, and a former Republican Hill staff member.

“There might be a variation of a day or two or four,” he guessed. But by sometime in March, Congress would have needed to raise the ceiling or the country might have entered another financial crisis — or even another recession.

On Capitol Hill, Fiscal Talks Now Turn to U.S. Borrowing Limit

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Obama Tells G.O.P. Not to Tie Debt Ceiling to Fiscal Debate

In a speech to the Business Roundtable, Mr. Obama called that irresponsible. “That is a bad strategy for America, it’s a bad strategy for your businesses and it is not a game that I will play,” he said. “Everybody here is concerned about uncertainty. There’s no uncertainty like the prospect that the United States of America, the largest economy, that holds the world’s reserve currency, potentially defaults on its debts.”

While saying he would not “play that game,” a phrase he repeated, Mr. Obama did not say what he would do in response, but some Democrats have urged him in the past to simply raise the borrowing limit using his own executive authority and let the courts determine if he overstepped his constitutional bounds.

He seemed to embrace a suggestion by John Engler, the Business Roundtable president, to raise the debt ceiling enough to last five years. “John is exactly right when he says that the only thing that the debt ceiling is good for as a weapon is just to destroy your credit rating,” Mr. Obama said.

Mr. Obama was reacting to reports that Republican leadership officials were looking for a fallback in the current debate to avert an end-of-the-year fiscal crisis. Some Republicans foresee accepting Mr. Obama’s call to extend Bush-era tax cuts for the middle class while allowing them to expire for the wealthiest Americans, and then taking up the fight again when the nation’s debt rises to the point that the statutory borrowing limit needs to be raised again, which could be in late January or February.

Republicans view any vote to raise the debt ceiling as a chance to enforce more fiscal discipline on Mr. Obama. Speaker John A. Boehner has said any increase in borrowing capacity should be offset by spending cuts that exceed the increased debt. Mr. Obama has responded by proposing to take away the Congressional power to approve increases in the debt ceiling, but Mr. Boehner said last weekend that “Congress is never going to give up this power.”

Appearing before reporters on Wednesday, Mr. Boehner and other House Republican leaders implored Mr. Obama to sit down with them and begin negotiating in earnest to head off the looming fiscal crisis, but with flattery and aggravation, they made it clear that they were now playing on his turf.

Mr. Boehner and his leadership team did not give an inch on their opposition to raising tax rates on the wealthy or their insistence that any deficit-reduction plan emphasize spending cuts. But the speaker sounded exasperated as he insisted that he had moved toward the president’s position by agreeing to $800 billion in higher tax revenue over 10 years.

“The revenues we’re putting on the table will come from guess who? The rich,” he said, his voice rising. “There are ways to limit deductions, close loopholes and have the same people pay more of their money to the federal government without raising tax rates.”

Representative Peter Roskam of Illinois, a member of the Republican leadership, appealed to Mr. Obama’s own view of himself as a politician able to rise above partisanship, a characterization Republicans have rarely, if ever, agreed with.

“I’ve seen an attribute in President Obama when we served together in the Illinois State Senate, where he was able to rise above donkeys and elephants and transform some very controversial issues in a way that was powerful,” Mr. Roskam said, imploring the president to eschew the politics of the victor and seize “an unbelievable opportunity to be a transformational president, that is to bring the country together.”

The dueling public appearances underscored how far apart the two sides were, at least as a matter of principle. Mr. Obama’s plan calls for $1.6 trillion in new taxes over 10 years, mainly through allowing rates to rise on income above $200,000 a year for individuals or $250,000 for families. He has also revived a year-old plan to trim health care and other mandatory spending by $600 billion over 10 years, but he also wants to spend $50 billion in the short term to help the economy.

Federal Deficit for 2012 Fiscal Year Falls to $1.1 Trillion

WASHINGTON — The federal deficit fell to $1.1 trillion in the 2012 fiscal year, down from about $1.3 trillion a year earlier, the Obama administration said on Friday.

That is the smallest deficit since 2008 but represents the fourth year in a row that the deficit has exceeded $1 trillion. Before the recession, which prompted huge federal spending and large tax cuts, the deficit had never exceeded half a trillion dollars.

The gap between government receipts and government spending — about 7 percent of economic output in the 2012 fiscal year, down from 8.7 percent in the 2011 fiscal year — has become a heated election-year political issue.

Republicans have hammered the Obama administration for not doing enough to control deficits and aid growth. “We’ve had four budgets, four trillion-dollar deficits,” Representative Paul D. Ryan of Wisconsin said during the vice-presidential debate on Thursday evening. “A debt crisis is coming. We can’t keep spending and borrowing like this. We can’t keep spending money we don’t have.”

Democrats have argued that the economy needs near-term support as well as long-term deficit reduction and have cautioned that too-severe budget cuts would unravel the social safety net.

“The president has put forward a balanced proposal to further strengthen the economy and reduce the country’s future deficits,” Timothy F. Geithner, the Treasury secretary, said in a statement on Friday. “It is time for Congress to act on these necessary steps that will help create sustainable economic growth for years to come.”

Releasing budget details for the full fiscal year that ran from last October through this September, the Treasury Department and the White House budget office said that the deficit was $238 billion less than it had forecast in the February budget proposal by the White House. Over all, government outlays were $3.5 trillion in the 2012 fiscal year, and receipts totaled about $2.45 trillion.

The shrinking deficit was a result of both higher tax receipts and lower government spending. Government receipts climbed 6.4 percent year-over-year as the economy grew stronger and certain tax breaks expired. Corporate income taxes were a “major contributor” to the rise in overall receipts, the administration report said, climbing to $242 billion, from $181 billion in 2011.

Moreover, outlays dropped $61 billion year-over-year because of falling military spending on Afghanistan and Iraq, tapering stimulus spending and the strengthening economy. “The largest decreases relative to the prior year came from the Department of Defense, unemployment insurance and Medicaid,” the report said.

The report comes as members of Congress struggle with the so-called fiscal cliff — huge tax increases and across-the-board spending cuts set to hit next year that might cut the deficit in half but would also risk throwing the country into a recession.

Economix Blog: The Tax Side of the Fiscal Cliff

Come January, if Congress fails to act, sweeping federal tax increases will hit in what is not at all affectionately nicknamed in Washington “taxmageddon.”

How big are those federal tax increases? The respected Tax Policy Center is out with a full analysis of the math, and estimates the impact at more than half a trillion dollars next year alone.

In the words of Eric Toder, one of the report’s authors, “It’s just a huge, huge number.” The paper is full of such numbers. About 9 in 10 Americans would see their tax bills go up. The average household would pay $3,500 more. The typical middle-income household would pay $2,000 more. An average household in the top 1 percent would pay $120,000 more. The average federal tax rate would climb a whopping 5 percentage points. Americans would have 6.2 percent less after-tax income.

The analysis walks through the pending tax increases. The payroll tax holiday goes away, raising taxes on America’s 160 million wage earners. New provisions from the Affordable Care Act bump up taxes on the investment income of high-income households, and the Bush tax cuts for capital gains and dividends expire. The Bush-era income tax cuts end as well, with the top rate climbing to 39.6 percent from 35 percent. Without adjustment, the alternative minimum tax affects millions more taxpayers. Tax credits enacted in the stimulus go away. The estate tax jumps. It goes on and on.

The Tax Policy Center’s analysis shows that the tax increases would be painful for everyone, rich and poor.

The very wealthy would have the biggest hit, with the top 1 percent of earners seeing their average federal tax rate climb by seven percentage points. The single biggest tax increase would be on dividend earnings, with the tax rate increasing by 20 percentage points.

But the poor would not go unscathed, either. For households in the lowest income quintile, earning less than $20,113 a year, the average federal tax rate would climb 3.7 percentage points, with taxes increasing $412 on average. That works out to about $8 a week.

“For us, it’s lunch,” said Roberton Williams, a study co-author. “For other people, it’s dinner and lunch and breakfast that day.”

Moreover, many low-income families, particularly those with children, would end up paying much more, because of changes like the halving of the child tax credit.

Of course, members of the administration and Congress are already hard at work behind closed doors, aiming to stave off some of the tax increases and spending cuts due by law — the “fiscal cliff,” as the Federal Reserve chairman, Ben S. Bernanke, calls it.

The study helpfully ranks the tax increases from those most likely to happen (the expiration of the payroll tax holiday and the new Affordable Care Act taxes) to those least likely to happen (the expiration of the Bush tax cuts for lower-income earners and of the alternative minimum tax patch).