US fiscal cliff: Winner Obama prepares for battle with Congress

President Barack Obama returned to Washington facing an expected battle with Republicans over the nation's "fiscal cliff", as shares on Wall Street tumbled on Wednesday. The president faces an urgent challenge to prevent the gridlock that scarred his first term as fears grew that politicians will fail to cut a deal to stop the economy falling over a "fiscal cliff".

More than $600billion (pounds 380billion) of tax rises and cuts in government spending are due in early January. Failure to avoid the cliff — the negative effects of the two measures combined — will plunge the world's largest economy back into a slump and disrupt the global economy's still fragile recovery, experts have forecast. Republican leaders wasted little time in ratcheting up the pressure on Obama to agree rapidly a deal that limits the scale of the austerity poised to hit in a matter of weeks.

Speaker John Boehner, who leads the Republicans in the House of Representatives and has spent the past year duelling with the White House, said both sides needed to work together to reach a compromise. He was echoed by Senate Democratic leader Harry Reid, who also called for bipartisan co-operation, stating: "We have to sit down and go to work on it now, not wait. This was really the message the American people sent."

Although Obama used his victory speech to supporters in Chicago to signal he will work with Republicans in Congress, the imminent threat from the fiscal cliff means that promise will be put to the test immediately. Mitt Romney, the defeated Republican challenger, used his concession speech to urge "Democrats and Republicans in government at all levels to put the people before the politics". "Do I expect peace to break out? No," said Bill Galston, a former adviser to Bill Clinton and a fellow of the Brookings Institute in Washington.

"Prolonged uncertainty over the fiscal cliff would be disastrous for national and global confidence, but I'm not sure how we avoid it." As Washington yesterday digested the outcome of one of the most bitter election campaigns in recent memory, concerns were building that America and the rest of the world will have an anxious wait for the resolution of the fiscal cliff.

Boehner held a conference call with Republican congressmen, and he faces a struggle to persuade them to sign up to a compromise that involves any tax increases. Meanwhile Charles Schumer, a leading Democratic senator from New York, said the message the American public sent at the polls was that "we need revenues, particularly on the higher income people".

The looming tax increases are happening because cuts in the rate Americans pay on personal income, capital gains and dividends all expire on December 31. Obama has said he will not agree to anything that fails to lift taxes on those Americans earning more than $250,000. The $110billion in public spending cuts are the first batch of a $1.2trillion retrenchment planned over the next decade, with half the cuts due to come from the Pentagon's budget.

One of Romney's campaign promises was to increase defence spending, and Republicans in Congress are unlikely to accept major cuts to the military. The urgency of the threat posed by the fiscal cliff was underlined as investors on Wall Street and in the City of London dumped shares within hours of the election results. The FTSE 100 closed down 1.6% at 5,791.63. Markets in New York recorded even steeper falls, with the Dow Jones Industrial Average plunging almost 300 points, or 2.2%, to 12,941.90 during the day on Wednesday.

"It's so damaging for the economy to have this continuous uncertainty hanging over it," said Jens Nordvig, an analyst in New York at Nomura Securities. The need to start negotiations comes as Obama tries to reshuffle his economic team. Tim Geithner, the treasury secretary, is leaving and experts warned that a replacement will need to be named quickly. Jack Lew, the current chief of staff at the White House and a former Citigroup banker, and Erskine Bowles, a former senior adviser to Bill Clinton and co-author of a highly-regarded plan on how to cut America's debt, are the front-runners.

Galston said that Obama would have to be far more involved in the nitty gritty of the negotiations than he was during last summer's drama over the raising of America's debt ceiling. The fiscal cliff is an early litmus test of Obama's ability to shepherd the economy and work with Republicans, two of the chief concerns of voters.

A compromise agreement will signal that the White House and Republicans in Congress may be able to build on the accord next year by reaching a major long-term deal that cuts America's $16trillion of debt. Besides hitting the economy now, failure would raise the spectre that America and the rest of the world will be subject to four more years of deep divisions in Washington at a time the world can ill afford them.

As he looks out at his second term, Obama also needs to break the gridlock on key domestic policy issues such as immigration reform and energy policy. The ability to do so may also herald a greater consensus on foreign policy issues, where the White House and Republicans have clashed over how to handle Iran's nuclear threat, the uprising in Libya, China's growing economic muscle and what to do about the civil war in Syria.