‘Fiscal cliff’ raises alarm for IMF chief

WASHINGTON — With just three weeks left for White House and congressional negotiators to avoid a fiscal crisis, central figures Sunday mixed cautious words of optimism with dire warnings about what a failure to act might mean.

Christine Lagarde, the managing director of the International Monetary Fund, warned that such a failure was the gravest threat now facing the still fragile U.S. economy - greater than the European debt crisis or any uncertainty in China.

“It would result in the stock market really taking a hit,” Lagarde said on the CNN program State of the Union. The overall result could be zero growth next year instead of the 2.1 percent growth rate projected by the IMF.

She called for a “balanced” agreement of revenue increases and spending cuts.

Despite her warning, Lagarde offered a cautious prediction that what she called American “pragmatism” would prevail and avert the worst outcome.

Meanwhile, a small but growing group of Republicans thinks the party should accede to President Barack Obama’s demand for higher tax rates for top earners so that the attention can shift to making cuts in benefit programs such as Medicare and Medicaid, a top Republican senator said Sunday.

Sen. Bob Corker of Tennessee, a member of the Banking Committee who had earlier presented a deficit reduction plan of his own, said on Fox News Sunday that if Republicans gave in to the president’s chief demand, then “all of a sudden, the shift goes back to entitlements and maybe it puts us in a place where we actually can do something that really saves the nation.”

Within hours of Corker’s comments, Obama and House Speaker John Boehner, R-Ohio, met privately at the White House for negotiations. Administration officials would not offer details of the discussion.

The White House and Boehner’s office issued identical statements afterward saying, “The lines of communication remain open.” On Friday, Boehner said another week had been wasted, with just three weeks left for lawmakers to avert the “fiscal cliff ” of automatic tax increases and spending cuts that go into effect in January if no deal is reached.

A proposal backed by Obama would raise $1.6 trillion in revenue over 10 years, partly by letting decade-old tax cuts on the country’s highest earners expire at the end of the year. He would continue those George W. Bush-era tax cuts for everyone except individuals earning more than $200,000 and couples making more than $250,000. The highest tax rates on top-paid Americans would rise from 33 percent and 35 percent, to 36 percent and 39.6 percent.

Boehner has offered $800 billion in new revenue to be raised by reducing or eliminating unspecified tax breaks for upper-income people. The Republican plan would cut spending by $1.4 trillion, including by trimming annual increases in Social Security payments and raising the eligibility age for Medicare benefits.

Other Republicans have been insisting that the Obama administration agree to substantial savings in entitlement programs as the two sides negotiate how to narrow the country’s huge deficits. But Corker is among Republicans who say that the party ultimately will have to yield to the Obama demand of higher tax rates for top earners, potentially back to the levels that prevailed under President Bill Clinton.

That group of Republicans, he said on Fox, was beginning to realize “that we don’t have a lot of cards as it relates to the tax issue before year-end” - but that a tax-rate concession could be converted into a tactical advantage.

Democrats haven’t been receptive to GOP proposals on the entitlement programs. Senate Democratic Whip Dick Durbin, D-Ill., on Sunday was skeptical about proposals to increase the eligibility age for Medicare from 65 to 67. He said he doesn’t see Congress addressing the complicated issue of Medicare overhaul in the three weeks remaining before the end of the year.

“I just don’t think we can do it in a matter of days here before the end of the year,” Durbin said. “We need to address that in a thoughtful way through the committee structure after the first of the year.”

Rep. Tom Cole, R-Okla., has said Obama and Boehner should agree not to raise tax rates on the majority of Americans and negotiate the rates for top earners later. Cole said Sunday that most House Republicans would vote for that approach because it doesn’t include a rate increase.

“You know, it’s not waving a white flag to recognize political reality,” Cole said.

Other key figures in the debate were cautiously optimistic that a deal could be reached.

Sen. Charles Schumer of New York, the No. 3 Senate Democrat, predicted an agreement that would include a stipulation that the national debt ceiling be raised, without further drama, when it comes due in late January or February.

“I believe, frankly, our Republican colleagues have learned that to say the government is not going to pay its debts and hold it up for something else is bad substance and bad politics,” he said on Fox News Sunday. “I don’t think they’ll prevail on that.”

Corker said he agreed with Schumer that a deal would be reached, and “we’re not going to go over the fiscal cliff.” But he suggested that Republicans would not so easily give up on the debt-ceiling leverage. “Republicans know that they have the debt ceiling that’s coming up right around the corner and the leverage is going to shift,” he said.

A Senate vote is required to raise the nation’s statutory borrowing limit.

One author of the much-disputed Simpson-Bowles debt reduction plan - the former Wyoming Sen. Alan Simpson, a Republican - also expressed some optimism Sunday. He said he thought a deal would be reached but that if it were too narrow - if it failed to make deep enough cuts in health-care spending or other big social programs - the economy, and Americans, would still suffer.

“I’m an optimist,” he said on the CBS program Face the Nation. “I think they’ll do something, but if they do small ball, that won’t work. The markets aren’t going to listen to that.”

His partner in the plan, Erskine Bowles, who was White House chief of staff under Clinton, warned that a failure in the ongoing negotiations would be “disastrous.” But, he said, he was more upbeat than he was a week ago, because of signs of movement from both sides.

After weeks of what he called “kabuki theater,” the two sides have “started to tango now,” Bowles said, also on CBS. Asked if a deal could be reached by the end of the year, Bowles replied, “They absolutely can do it. If they don’t do it, shame on them.” Information for this article was contributed by Brian Knowlton and Jackie Calmes of The New York Times and by Anne Flaherty and Julie Pace of The Associated Press.