The Obama administration is in "advanced internal discussions" on a plan to reduce the timing and size of spending cuts and cut tax hikes set to take effect in January, an event known as the fiscal cliff, according to a published report.
The Wall Street Journal said Friday that White House officials -- who declined to comment -- are working to propose a package of smaller spending cuts and smaller tax hikes. Word of the administration's discussions emerged the same day that leaders of the two parties begin talks to avert the fiscal cliff.
Under terms of last year's Budget Control Act, yearly spending cuts of about $100 billion will begin in 2013 and for the subsequent eight years. Such spending reductions would hit military contractors like Lockheed Martin Corporation (NYSE:LMT) and Northrup Grumman Corporation (NYSE:NOC).
News of the White House moves marks one of the initial attempts at averting the fiscal cliff in the approximately six weeks left before the new year begins. Prospects that Democrats, who control the Senate and the White House, and Republicans, who control the House of Representatives, may not meet that six-week deadline have spooked equity markets.
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If no progress is made, the Budget Control Act's spending cuts and tax hikes will reduce the deficit by about $500 billion in the first nine months of next year. But it also would cut GDP by about 3 percent, according to the nonpartisan Congressional Budget Office. With most economists' estimates for 2013 GDP at about 2 percent, the fiscal cliff would be expected to send the U.S. economy into a recession next year.
Besides the spending cuts, Washington leaders face the expiration of Bush-era tax cuts and need to find a way to halt the scope of the Alternative Minimum Tax -- all on top of the usual year-end priorities, the Journal said.
Obama administration officials have discussed postponing spending cuts for six to 12 months and then come up with smaller reductions. That general approach, reduce the size and delay the onset of spending cuts, also has been discussed by Republican leaders.