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US Congress okays deal to stave off 'fiscal cliff'

After fervent New Year brinkmanship, the US Congress today finally backed a deal to avert a "fiscal cliff" of tax hikes and slashing spending cuts that had threatened to unleash economic calamity.

business Updated: Jan 02, 2013 16:14 IST

After fervent New Year brinkmanship, the US Congress on Tuesday finally backed a deal to avert a "fiscal cliff" of tax hikes and slashing spending cuts that had threatened to unleash economic calamity.

As global stock markets made their 2013 debut, the House of Representatives passed a deal between the White House and Senate Republicans to raise taxes on the rich and put off automatic $109 billion budget cuts for two months.

The deal passed the Senate early on Tuesday, but its fate hung in the balance for hours as House conservatives sought to amend it to include big spending cuts, which would likely have killed it.

In the end, the House voted 257 votes to 167 to pass the original bill with minority Democrats joining a smaller number of majority Republicans to pass the legislation after a bitterly contested and unusual session on New Year's Day.

President Barack Obama planned to make brief remarks at the White House within minutes of passage of the deal, which relieved investors who feared that continued logjam could have sent global stock markets spinning.

Wall Street

Had the deal splintered, all Americans would have been hit by tax increases and the spending cuts would have kicked in across the government, in a combined $500 billion shock that could have rocked the fragile recovery.

A TV grab shows the C-SPAN channel Live transmission from the US House of the Representatives voting for the Tax Relief Extension Act. AFP Photo

The House vote took place after a conservative rebellion fizzled when it became clear there were not sufficient votes in the restive Republican caucus to send an amended version of the bill with spending cuts back to the Senate.

Republican party leaders ultimately feared they would carry the can if the deal collapsed, leaving Americans enraged by higher taxes and the prospect that an economy slowly recovering from crisis could be plunged back into recession.

The angry political feuding which spanned the Christmas and New Year holidays reflected the near impossibility in forging compromise in Washington, where power is divided between a Democratic president and Republican House.

US President Barack Obama makes his way to board Air Force One at Andrews Air Force Base in Maryland. AFP Photo

It also was a signal that Obama, despite a thumping re-election win in November, may find tough sailing for his major second term legislative goals, including immigration reform, clean energy legislation and gun control.

The truce in Washington's dysfunctional, divided Congress is likely to be brief, given the fight that will ensue over the spending cuts that now looms at the end of February as well as over regular budget bill extensions.

Those fights will be paralleled by one over Obama's request for Congress to lift the country's $16 trillion borrowing limit. Republicans are demanding concessions on expenditures while Obama has warned he will not bargain. Fiscal cliff deal made tax system fairer: Obama

Democratic congressman Jim Moran warned that Tuesday's deal would simply "set up three more fiscal cliffs."

"We're going to look back on this night and regret it."

Earlier, House Speaker John Boehner's coalition vented fury that the deal had not contained significant spending cuts to eat into national debt.

"We have to in some way address spending," Republican congressman Spencer Bachus said.

The powerful number two Republican in the chamber Eric Cantor had injected momentum into the rebellion after he told a high-stakes meeting of the party caucus that he was opposed to the bill.

The deal to avert the fiscal cliff agreed on Monday raised income taxes only on households earning $450,000 a year and exempted anyone else. A dud on deficit front

The vote represented a win for Obama as it raises taxes on the richest Americans in line with a re-election campaign promise -- albeit above an income threshold higher than he and other Democrats had wanted.

The deal also includes an end to a temporary two percent cut to payroll taxes for Social Security retirement savings -- meaning all Americans will pay a little more -- and changes to inheritance and investment taxes.

House Speaker John Boehner and Rep Eric Cantor walk to a meeting with House Republicans at the US Capitol in Washington, DC. AFP Photo

Reluctant Republicans

For a few hours, it looked like Washington would send the country over the fiscal cliff after all, until Republican leaders determined that they did not have the votes for spending cuts.

In the end, they reluctantly approved the Senate bill by a bipartisan vote of 257 to 167 and sent it on to Obama to sign into law.

"We are ensuring that taxes aren't increased on 99% of our fellow Americans," said Republican Representative David Dreier of California.

The vote underlined the precarious position of House Speaker John Boehner, who will ask his Republicans to re-elect him speaker on Thursday when a new Congress is sworn in.

Boehner backed the bill but most House Republicans, including his top lieutenants, voted against it. Key points in bill

US President Barack Obama delivers remarks after the House of Representatives acted on legislation at the White House in Washington. Reuters

The speaker had sought to negotiate a "grand bargain" with Obama to overhaul the US tax code and rein in health and retirement programs that are due to balloon in coming decades as the population ages.

But Boehner could not unite his members behind an alternative to Obama's tax measures.

Income tax rates will now rise on families earning more than $450,000 per year and the amount of deductions they can take to lower their tax bill will be limited.

Low temporary rates that have been in place for the past decade will be made permanent for less-affluent taxpayers, along with a range of targeted tax breaks put in place to fight the 2009 economic downturn.

However, workers will see up to $2,000 more taken out of their paychecks annually with the expiration of a temporary payroll tax cut.

The non-partisan Congressional Budget Office said the bill will increase budget deficits by nearly $4 trillion over the coming 10 years, compared to the budget savings that would occur if the extreme measures of the cliff were to kick in. 'Fiscal cliff' deal so-so for US businesses

But the measure will actually save $650 billion during that time period when measured against the tax and spending policies that were in effect on Monday, according to the Committee for a Responsible Federal Budget, an independent group that has pushed for more aggressive deficit savings.

(With inputs from AFP and Reuters)