The failure of a special deficit-reduction supercommittee sets up a year-end battle between President Barack Obama and a dysfunctional Congress over renewing a payroll tax cut and jobless benefits for millions.
At the same time, the debt panel's failure triggers deep, automatic cuts to the Pentagon budget, beginning in 2013, that defense hawks already are dedicated to unwinding. Domestic programs would bear cuts as well.
And the panel's failure puts taxes and out-of-control deficits front and center in next year's presidential and congressional campaigns. The election's outcome is likely to determine whether Bush-era tax cuts that expire in December 2012 will be fully renewed or whether Obama can force Republicans to make concessions on taxes.
Obama supports renewing most of the Bush tax cuts but wants to allow tax rates for wealthier earners to go up.
"He won't sign a full extension," said a senior administration official, requiring anonymity to discuss White House strategy. "We're going to be in the position at the end of next year where the president is saying: `I'm not going to sign a full extension, but send me the middle-class tax cuts.'"
The panel's failure to reach agreement on how to cut deficits by $1.2 trillion or more over 10 years was not unexpected but grew out of intractable divisions over spending and taxes that promise to hound lawmakers through 2012 elections that could sort it all out.
Stock prices plummeted at home and across debt-scarred Europe on Monday as the panel ended its brief, secretive existence without an agreement. Republicans and Democrats alike pointed fingers, maneuvering for political advantage in advance of elections less than a year away.
Lawmakers of both parties agreed action in Congress was still required, somehow and soon.
"Despite our inability to bridge the committee's significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve," the panel's two co-chairs, Sen. Patty Murray, D-Wash., and Rep. Jeb Hensarling, R-Texas, said in a somber statement.
Obama, who was criticized by Republicans for keeping the committee at arm's length, said refusal by the GOP to raise taxes on the wealthy was the main stumbling block to a deal.
Obama pledged to veto any attempt by lawmakers to repeal a requirement for $1 trillion in automatic spending cuts that are to be triggered by the supercommittee's failure to reach a compromise, unless Congress approves an alternative approach.
"I will veto any effort to get rid of those automatic spending cuts to domestic and defense spending. There will be no easy off-ramps on this one," Obama said.
The panel's failure left lawmakers confronting a large and controversial agenda for December, including Obama's call to extend an expiring payroll tax cut enacted last year to prop up the economy, as well as unemployment benefits averaging about $300 a week for the long-term jobless.
Neither item is an easy lift, especially given the hard feelings _ and presidential politics _ consuming Washington.
Democrats had wanted to add those items and more to any compromise, and lawmakers in both parties also face a struggle to stave off a threatened 27 percent cut in payments to doctors who treat Medicare patients.
Based on accounts provided by officials familiar with the talks, it appeared that weeks of private negotiations had done nothing to alter a fundamental divide between the two political parties.
Before and during the talks, Democrats said they would agree to significant savings from benefit programs like Medicare, Medicaid and Social Security only if Republicans would agree to a hefty dose of higher taxes, including cancellation of Bush-era cuts at upper-income brackets.
In contrast, the GOP side said spending, not revenue, was the cause of the government's chronic budget deficits, and insisted that the tax cuts approved in the previous decade all be made permanent.
The panel's failure marked the end of a yearlong effort by divided government to grapple with budget deficits that lawmakers of both parties and economists of all persuasions agreed were unsustainable.
Negotiations this spring and summer led by Vice President Joseph Biden were followed by an extraordinary round of White House talks in which Obama and House Speaker John Boehner, R-Ohio, sought a sweeping compromise to cut trillions from future deficits. They outlined a potential accord that would make far-reaching changes in Medicare and other programs, while generating up to $800 billion in higher revenue through an overhaul of the tax code. But in the end, they failed to agree.
By contrast, the supercommittee never seemed to come close.