U.S. congressional leaders emerged from a meeting with President Barack Obama in Washington Friday suggesting they had a "constructive" session aimed at negotiating a new deal on how the U.S. government handles its finances, an attempt to avoid what’s being called the "fiscal cliff."

House Speaker John Boehner said he outlined a "fair and balanced" Republican proposal that allowed for tax increases and spending cuts.

Boehner's framework, according to one official, called for a deficit down-payment of unspecified size by year's end, to be followed by comprehensive tax reform and an overhaul of Medicare and other benefit programs in 2013.

Democrat Senate Majority Leader Harry Reid described the talks as "constructive" and said "we have the outlines for a deal."

Democrats indicated some spending cuts would be fine with them. "I feel confident that a solution may be in sight," said House Democratic leader Nancy Pelosi of California.

In remarks while reporters were present, Obama stressed that time was short as he welcomed the leaders to the White House for the first time since winning re-election this month.

"We have urgent business to do," he said.

"It's a good start ... the fact that they were all standing together," said Ben Schwartz, the chief market strategist at Lightspeed Financial, a New York-based broker.

Flaherty says 'credible' plan needed

Later in the day, in New York, Canada's Finance Minister Jim Flaherty said in a speech the U.S. needs a credible medium-term plan to reduce its fiscal deficit over time.

Flaherty told the Foreign Policy Association the U.S. also needs a political agreement in the short term so that investors can be confident that the country's nascent economic recovery will continue.

"This is a very serious risk and it is not to be taken lightly, it will have rather rapid effects on other economies including Canada's" Flaherty told reporters after the speech on a conference call from New York.

Flaherty said he made the visit to encourage U.S. leaders to "act decisively" so that a deal is reached as soon as possible before the clock ticks further toward a Jan. 1 deadline to avoid "slippage" in economic output both in the U.S. and Canada.

But he also expressed faith in U.S. lawmakers that they would be able to figure out a solution palatable to both sides.

"We all know the U.S. is facing challenges on the fiscal front, but as with previous challenges, including two world wars, I might add, I have every confidence they will overcome these in a way that continues to inspire," he said.

Earlier this week, the Harper government pushed back its target date for eliminating the deficit by one year due to global economic weakness that has carved into commodity prices and tax revenues.

On Jan. 1, Americans could face a combined $600 billion US in tax increases coupled with draconian cuts in government programs if Obama and his Democrats are unable to hammer out a compromise with Republicans on a more moderate program of fiscal restraint.

Without a deal, $85 billion in federal spending will be automatically eliminated — $32 billion from military spending and $53 billion in across-the-board cuts to education, health care, law enforcement and other social programs.

A typical middle-income American family making $40,000 to $64,000 a year could see its taxes go up by $2,000 if the fiscal cliff terms take effect, according to a study by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

The Tax Policy Center said households in the top one per cent income range would see an average tax increase of more than $120,000, while a family making between $110,000 to $140,000 could see a tax hike in the $6,000 range.

U.S. recession would be far-reaching

The fear is that cuts of that magnitude would shrink Americans’ paycheques with higher taxes, resulting in less consumer spending, which represents 70 per cent of U.S. economic activity.

Compounding that, people who depend on an array of social programs from education for their children to certain health care programs would find them spending more on that even as incomes are diminished by higher taxes.

That might be enough to push the U.S. economy into recession and, since the United States remains the world's largest economy, the repercussions would be felt worldwide, compounding other problems, such as the weak European economy.

Democrats and Republicans agreed last year to schedule the automatic cuts, though neither side wants them and both hope they won't take place.

It was a compromise worked out to end a dispute about the government's borrowing authority that threatened to send the U.S. into default.

The cuts were seen as so politically untenable that they were expected to be an overwhelming incentive for both Republicans — who are deeply opposed to cuts for the Pentagon — and Democrats — who want to keep government social programs in place — to take more palatable action this year on the federal debt.

With files from The Canadian Press and The Associated Press