Business Leaders Spooked by ‘Fiscal Cliff’

Fears about Washington’s inability to avoid looming tax increases and spending cuts have eclipsed concerns about Europe’s debt crisis, top business executives said Tuesday, worrying that political gridlock might tip the economy into recession next year.

President Barack Obama will begin budget negotiations with congressional leaders Friday by calling for $1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept.

At a Wall Street Journal CEO Council conference in Washington, 73% of participants surveyed said their primary concern was the “fiscal cliff,” the federal spending cuts and tax increases that begin in January unless policy makers intervene. Only 12% said their top fear was Europe’s financial turmoil.

Separately, Bank of America Corp. Chief Executive Brian Moynihan said at an investor conference in New York Tuesday that uncertainty about U.S. tax and spending policies has prevented many clients from investing.

The concerns will be front and center at a White House meeting Wednesday between President Barack Obama and 12 chief executives, including Wal-Mart Stores Inc.’s Michael Duke and PepsiCo Inc.’s Indra Nooyi.

Mr. Obama and Congress are seeking to craft a long-term deficit-reduction package that could replace the fiscal cliff, but they have made little progress and have just seven weeks to cut a deal.

“I think everyone just has this fear that they just do as they’ve done the last four years and just lob grenades at each other,” said David Crane, chief executive of NRG Energy Inc., power-generation and electricity firm. “CEOs, whether they’re Republicans or Democrats, they’re deeply pragmatic people and you just don’t play with craziness like our government is playing with right now.”

The fiscal cliff would raise taxes roughly by $400 billion and cut spending by roughly $100 billion in 2013 compared with 2012 levels. Several economists say the measures would cause another recession.

Democrats and Republicans said they want to enact a package of long-term measures to reduce the federal budget deficit, which has exceeded $1 trillion for four straight years, but they are divided over issues related to taxes and big entitlement programs like Medicare.

Mr. Obama and House Speaker John Boehner (R., Ohio) have suggested they are open to compromise and don’t want to replay the brinkmanship that occurred last year during a fight over raising the government’s borrowing limit. But negotiations are almost certain to spill into mid-December, and perhaps even beyond.

Several CEOs said this uncertainty has prompted them to make contingency plans for layoffs and prepare for a sharp economic contraction, which is holding back investment.

“The greatest stimulus is certainty,” Putnam Investments CEO Robert Reynolds said. “Here you are, November 13, and you don’t know what your tax rate is next year, you don’t necessarily know what you’re going to be paying in health care, capital gains, dividends. They all have a tremendous impact on the way people act.”

Business leaders and policy makers have known of the fiscal cliff since it was created last year as part of the deal to raise the debt ceiling. But few paid much attention to it because they were focused on the presidential race. “The narrative of the country was completely dominated by the election, and that’s changing currently,” said Stephen Schwarzman, chief executive of the Blackstone Group., a private-equity firm.

Austan Goolsbee, a former economic adviser to Mr. Obama, said at the conference that many business executives he speaks with assume policy makers “are not so stupid that they’ll let this happen. But look, they are that stupid. They could easily be that stupid.”

Different business sectors are split over what policy makers should do. Some have called for Congress to extend all expiring tax cuts for at least another year. Others have said Congress should raise taxes as part of a broader deficit-reduction plan that cuts spending on Medicare and Social Security. And some say fears of the fiscal cliff are overblown.

Seifi Ghasemi, CEO of Rockwood Holdings Inc., a manufacturer of specialty chemicals, said preventing another war in the Middle East over Iran and bolstering Europe’s economy are bigger concerns than the fiscal cliff.

The long-term U.S. deficit must be addressed, Mr. Ghasemi said, but, “I wouldn’t lose a lot of sleep if we have negative growth for one quarter in order to solve the longer-term problem.”

—Siobhan Hughes and Michael R. Crittenden contributed to this article.

Updated November 14, 2012


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