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Democrats' Bid to Replace Sequester Central to Fiscal Cliff Standoff

Negotiations aimed at a last-ditch budget deal were at a standoff over the weekend, in part because of attempts by Democrats to address the $109 billion in automatic spending cuts slated to take effect in the current fiscal year.

Democrats tried to use new tax revenue to postpone the sequester, but Republicans rebuffed their offer, saying it would do nothing to reduce the deficit. Republicans initially proposed moving to a new measure of inflation — known as chained consumer price index — to raise money that could be used to offset the budget cuts. But they backed off after Democrats refused to consider the shift, which would effectively cut Social Security benefits in future years, in the current fiscal talks.

“We’re going back and forth on the sequester, there’s no question about that,” Sen. Richard J. Durbin, D-Ill., said.

“There’s an attempt by the other side to cause the sequester to be dealt with,” Sen. Bob Corker, R-Tenn., said.

Republicans said they had come around to the notion that tax rates would rise for high-income earners. But they were adamant that revenue should be used to pay down the deficit and bristled at Democratic suggestions that it be used to offset the sequester, which would cut virtually all government accounts across the board.

“What we want to see happen, if there’s going to be revenues involved, those revenues are applied to paying down the debt,” said Sen. John Thune, R-S.D. “What they’re insisting on is that new tax revenues be used to pay for new spending and that’s something Republicans are not going to accept.”

“If they want to do away with the sequester cuts, then figure out another way to pay for it,” he said. “One of the ways we suggested was chained CPI, but evidently that was something they say is a nonstarter. If it is, give us another proposal.”

By the time senators broke for the night on Sunday, the future of the spending cuts was still unresolved.

Leaving the automatic spending cuts to be dealt with next year could undermine prospects that a fiscal cliff agreement would spur the country’s fledgling economic recovery, even if an extension of some expiring tax rates calms jittery financial markets and eases taxpayer concerns.

According to the Bipartisan Policy Center, implementation of the sequester would reduce the nation’s economic growth in 2013 by half a percentage point and cost the economy roughly a million jobs primarily because federal contractors are expected to shed private workers.

Economists have projected the economy would pick up speed next year following a five-year slump. Without the spending cuts, the Federal Reserve estimates the economy will grow between 2.3 percent and 3 percent next year, while the unemployment rate will continue to fall to between 7.4 percent and 7.7 percent.

Already, the housing market is showing signs of a rebound, with prices in 20 cities rising 4.3 percent over a year ago, according to the S&P Case-Schiller home price index. New home sales rose to their highest level since April 2010, according to Census Bureau figures. And while consumer confidence has been depressed because of fiscal fears, many respondents to the Conference Board’s surveys say they are hopeful that the job market is improving.

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