Come January 5, Republicans, sharpening their knives to cut spending and government to size, will take control of the House, also becoming stronger in Senate with shrunken Democrat majority. They will then begin asserting their power in the divided government. Notwithstanding the compromise over tax cuts, Republicans are working on their agenda to repeal President Obama’s historic health care reform enactment and also to revise the financial regulatory reform measures. One of their boisterous leaders keeps chanting the mantra of limiting President Obama to one term.

An unruffled President, looking the other way, hopes to build more “common ground” with Republicans over his next two years to record “principled agreements” to move the country forward. The five-week lame-duck session of the 111th Congress turned out to be “the most productive post-election period” in decades, as the President put it, with accomplishments going beyond expectations, like the 858-billion dollar tax cuts and unemployment insurance package and ratification of the new strategic arms reduction treaty with Russia (START) – a major foreign policy victory for President Obama.

Both were preceded by weeks of hard negotiations with Republicans who were unwilling to enlarge fiscal deficit involved in agreeing to stimulus measures and were even more determined to deny the requisite two-thirds majority for Senate ratification of the Treaty which they wanted deferred to the new (112th) Congress in 2011. But the President’s persistence paid off and the Senate ratification by 71 votes to 26 (more than the two-thirds needed in the 100-member chamber) handed him a major foreign policy victory.

President Obama hailed the vote for his top national security priority and said the Treaty was “the most significant arms control agreement in two decades which would make us safer and reduce our nuclear arsenals along with Russia”. With this Treaty, US inspectors will also be back on the ground at Russian nuclear bases. “So we will be able to trust but verify”. It was strongly commended by the nation’s military leaders.

On tax cuts, President Obama had to strike a compromise giving in to Republican demand for extension of the Bush era tax cuts for the wealthy while he had wanted to allow the cuts only for the middle class families with incomes of 250,000 dollars a year or less. This concession to allow the rich to enjoy tax cut, together with a reduction in estate tax in some cases, angered most of his party men especially Liberal Democrats in the House. The President had a hard time bringing them around.

The President, however, succeeded in pushing through a substantial stimulus package for the economy which included also tax cuts to most of the working families he had originally proposed in the Recovery and Reinvestment Act 2009, extension of unemployment insurance for two million families, a cut in pay-roll tax for all employees, renewable energy grants and investment allowance for businesses for one year.

Economists agree that the latest package can contribute an additional one percentage point to GDP growth in 2011raising it to 4 per cent approximately with payrolls growing though unemployment would decline slowly to just below 9 per cent by the end of the year. Growth in the third quarter of 2010 was 2.6 per cent after a mere 1.7 per cent in the second quarter. The package has incentives for business to invest, grow and hire. Most of the savings for the working class and the benefits for the unemployed would be spent thereby helping to grow the economy.

The downside to this deal is the big rise in budget deficit which is already well above one trillion dollars. President Obama plans to initiate a debate with Republicans on deficit and debt reduction. He concedes that although “we have shown capacity to make progress together, I am not naïve, and there will be tough fights in the months ahead”. Republicans blocked the 1.2 trillion dollar spending bill for fiscal 2011 and Congress vote only covers expenditure till March.

The President will set out his New Year agenda in the traditional State of Union address in the latter half of January and present his Budget proposals for fiscal 2012 in February. He foresees disagreements with Republicans in terms of spending priorities, especially where it is vital for the nation to make investments in education, research and development for an innovative economy.

But, he says, the pivot now has to be on jobs and growth and his “singular focus” over the next two years – the second half of his presidency – would be to “jumpstarting “the economy, rescued from the brink, to start making a debt in unemployment rate, which stood at 9.8 per cent in November, and “equipping ourselves so that we can compete in the 21st century”. He acknowledges for Republican comfort that the private sector would be the driving force in every sector, from manufacturing to clean energy to high-tech, and Government’s role would be being “a good partner, facilitator and, in some cases, a catalyst”.

But it is uncertain how far he could succeed in persuading Republicans and Conservative Democrats to give up what he calls “old dogmas” and to think anew on challenges ahead. Government and business would have to get rid of regulations that impede innovation but must also ensure ways of protecting consumers and the environment.

While the Republicans agenda is to freeze spending at 2008 levels, there will inevitably be sharp disagreements with the Administration both in regard to size and priorities in the budget. The Administration holds the view that while while programmes that do not work could be cut, there are important priority sectors where funding would be essential. At the same time, the President makes it clear that over the long run, “we cannot afford a series of tax breaks for people who are doing very well and do not need them”. They would continue to be rich if those cuts went away, he said.

The White House is also examining the report of the National Commission on Fiscal Responsibility and Reforms. While the Budget in February may incorporate some ideas in the report, the President has said major recommendations of the Commission will have to be discussed extensively in the coming months with Republicans and Democrats and other interests. The Commission has suggested gradual elimination of tax breaks which could save one trillion dollars. It has also proposed a simpler code with three rates of taxation significantly lower than the present levels with the maximum at 28 per cent both for individuals and corporate. (IPA Service)