WRAPUP 13-United States avoids calamity in 'fiscal cliff' drama

* Obama wins victory in tax fight

* Vote caps weeks of budget wrangling

* House Republicans back away from plan to confront Senate

* Bill raises taxes on the wealthiest

By Andy Sullivan and Richard Cowan

WASHINGTON, Jan 1 (Reuters) - The United States averted economic calamity on Tuesday when lawmakers approved a deal to prevent huge tax hikes and spending cuts that would have pushed the world's largest economy off a "fiscal cliff" and into recession.

The agreement hands a clear victory to President Barack Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith.

The deal also resolves, for now, the question of whether Washington can overcome deep ideological differences to avoid harming an economy that is only now beginning to pick up steam after the deepest recession in 80 years.

Consumers, businesses and financial markets have been rattled by the months of budget brinkmanship. The crisis ended when dozens of Republicans in the House of Representatives buckled and backed tax hikes approved by the Democratic-controlled Senate.

Asian stocks hit a five-month high and the dollar fell as markets welcomed the news. China's state news agency Xinhua took a more severe view, warning the United States must get to grips with a budget deficit that threatened not a "fiscal cliff" but a "fiscal abyss". Most of China's $3.3 trillion foreign exchange reserves are held in dollars.

The vote averted immediate pain like tax hikes for almost all U.S. households, but did nothing to resolve other political showdowns on the budget that loom in coming months. Spending cuts of $109 billion in military and domestic programs were only delayed for two months.

Obama urged "a little less drama" when the Congress and White House next address thorny fiscal issues like the government's rapidly mounting $16 trillion debt load.

There was plenty of drama on the first day of 2013 as lawmakers scrambled to avert the "fiscal cliff" of across-the-board tax hikes and spending cuts that would have punched a $600 billion hole in the economy this year.

As the rest of the country celebrated New Year's Day with parties and college football games, the Senate stayed up past 2 a.m. on Tuesday and passed the bill by an overwhelming margin of 89 to 8.

When they arrived at the Capitol at noon, House Republicans were forced to decide whether to accept a $620 billion tax hike over 10 years on the wealthiest or shoulder the blame for letting the country slip into budget chaos.

The Republicans mounted an effort to add hundreds of billions of dollars in spending cuts to the package and spark a confrontation with the Senate.

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 percent 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.

The speaker had sought to negotiate a "grand bargain" with Obama to overhaul the U.S. 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.

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.

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WRAPUP 13-United States avoids calamity in 'fiscal cliff' drama

* Obama wins victory in tax fight

* Vote caps weeks of budget wrangling

* House Republicans back away from plan to confront Senate

* Bill raises taxes on the wealthiest

By Andy Sullivan and Richard Cowan

WASHINGTON, Jan 1 (Reuters) - The United States averted economic calamity on Tuesday when lawmakers approved a deal to prevent huge tax hikes and spending cuts that would have pushed the world's largest economy off a "fiscal cliff" and into recession.

The agreement hands a clear victory to President Barack Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith.

The deal also resolves, for now, the question of whether Washington can overcome deep ideological differences to avoid harming an economy that is only now beginning to pick up steam after the deepest recession in 80 years.

Consumers, businesses and financial markets have been rattled by the months of budget brinkmanship. The crisis ended when dozens of Republicans in the House of Representatives buckled and backed tax hikes approved by the Democratic-controlled Senate.

Asian stocks hit a five-month high and the dollar fell as markets welcomed the news. China's state news agency Xinhua took a more severe view, warning the United States must get to grips with a budget deficit that threatened not a "fiscal cliff" but a "fiscal abyss". Most of China's $3.3 trillion foreign exchange reserves are held in dollars.

The vote averted immediate pain like tax hikes for almost all U.S. households, but did nothing to resolve other political showdowns on the budget that loom in coming months. Spending cuts of $109 billion in military and domestic programs were only delayed for two months.

Obama urged "a little less drama" when the Congress and White House next address thorny fiscal issues like the government's rapidly mounting $16 trillion debt load.

There was plenty of drama on the first day of 2013 as lawmakers scrambled to avert the "fiscal cliff" of across-the-board tax hikes and spending cuts that would have punched a $600 billion hole in the economy this year.

As the rest of the country celebrated New Year's Day with parties and college football games, the Senate stayed up past 2 a.m. on Tuesday and passed the bill by an overwhelming margin of 89 to 8.

When they arrived at the Capitol at noon, House Republicans were forced to decide whether to accept a $620 billion tax hike over 10 years on the wealthiest or shoulder the blame for letting the country slip into budget chaos.

The Republicans mounted an effort to add hundreds of billions of dollars in spending cuts to the package and spark a confrontation with the Senate.

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 percent 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.

The speaker had sought to negotiate a "grand bargain" with Obama to overhaul the U.S. 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.

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.

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United States avoids calamity in "fiscal cliff" drama

1 of 12. Speaker of the House John Boehner (R-OH) walks with House Majority Leader Rep. Eric Cantor (R-VA) to a meeting with House Republicans on the ''fiscal cliff'' budget deal on Capitol Hill in Washington on January 1, 2013. Washington's last-minute scramble to step back from a ''fiscal cliff'' ran into trouble on Tuesday as Republicans in the House of Representatives balked at a deal to avert a budget crisis.

Credit: Reuters/Joshua Roberts

By Andy Sullivan and Richard Cowan

WASHINGTON | Wed Jan 2, 2013 4:21am EST

WASHINGTON (Reuters) - The United States averted economic calamity on Tuesday when lawmakers approved a deal to prevent huge tax hikes and spending cuts that would have pushed the world's largest economy off a "fiscal cliff" and into recession.

The agreement hands a clear victory to President Barack Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith.

The deal also resolves, for now, the question of whether Washington can overcome deep ideological differences to avoid harming an economy that is only now beginning to pick up steam after the deepest recession in 80 years.

Consumers, businesses and financial markets have been rattled by the months of budget brinkmanship. The crisis ended when dozens of Republicans in the House of Representatives buckled and backed tax hikes approved by the Democratic-controlled Senate.

Asian stocks hit a five-month high and the dollar fell as markets welcomed the news. China's state news agency Xinhua took a more severe view, warning the United States must get to grips with a budget deficit that threatened not a "fiscal cliff" but a "fiscal abyss". Most of China's $3.3 trillion foreign exchange reserves are held in dollars.

The vote averted immediate pain like tax hikes for almost all U.S. households, but did nothing to resolve other political showdowns on the budget that loom in coming months. Spending cuts of $109 billion in military and domestic programs were only delayed for two months.

Obama urged "a little less drama" when the Congress and White House next address thorny fiscal issues like the government's rapidly mounting $16 trillion debt load.

There was plenty of drama on the first day of 2013 as lawmakers scrambled to avert the "fiscal cliff" of across-the-board tax hikes and spending cuts that would have punched a $600 billion hole in the economy this year.

As the rest of the country celebrated New Year's Day with parties and college football games, the Senate stayed up past 2 a.m. on Tuesday and passed the bill by an overwhelming margin of 89 to 8.

When they arrived at the Capitol at noon, House Republicans were forced to decide whether to accept a $620 billion tax hike over 10 years on the wealthiest or shoulder the blame for letting the country slip into budget chaos.

The Republicans mounted an effort to add hundreds of billions of dollars in spending cuts to the package and spark a confrontation with the Senate.

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 percent 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.

The speaker had sought to negotiate a "grand bargain" with Obama to overhaul the U.S. 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.

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.

(Additional reporting by Rachelle Younglai, Thomas Ferraro, Mark Felsenthal, David Lawder; Writing by Andy Sullivan; Editing by Alistair Bell and Eric Beech)

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Passage of bill to avoid "cliff" should bolster Wall Street

Speaker of the House John Boehner (R-OH) (front, in green tie) walks with Congressman Dave Camp (R-MI) (R) after a meeting with House Republicans about a ''fiscal cliff'' deal on Capitol Hill in Washington January 1, 2013.

Credit: Reuters/Joshua Roberts

By Ryan Vlastelica

NEW YORK | Wed Jan 2, 2013 12:16am EST

NEW YORK (Reuters) - U.S. stocks are poised for gains to begin the year after the late passage of a bill to avoid harsh tax hikes that would have hit most Americans and crimped economic growth.

However, harsh reality awaits any euphoria that comes from avoiding the "fiscal cliff". In two months, battles over further spending cuts and, in particular, the U.S. federal debt limit will come to a head.

The House of Representatives voted for a bill passed on Monday by the Senate that will raise taxes on wealthy individuals and families and preserve certain other benefits that will, together, soften some of the blow that would have been sustained without an agreement to avoid the fiscal cliff.

That puts Wall Street in prime position to begin 2013 with a rally, even if thorny issues remain to be addressed in the coming months in Washington.

Asian markets extended gains modestly, with the MSCI Asia Pacific ex-Japan index of stocks up 1.7 percent. U.S. markets will not have a chance to react until 6 a.m. ET, when futures trading begins after the New Year's Day holiday.

"When you separate the fundamentals of the economy from the headlines, the fundamentals really suggest we can support higher prices in the new year," said Bill Vaughn, equity portfolio manager at Evercore Wealth Management in San Francisco.

The Standard & Poor's 500 stock index ended the year up 13 percent, its best gain since 2009, mostly shrugging off the debt-related worries that dominated headlines during the year.

Equity markets held up in the last two months of the year as well, expecting a resolution to head off $600 billion in spending cuts and tax hikes that could push the economy into recession if they stay in effect for long. While the deadline to avert the cliff was December 31, legislation can be formulated to retroactively prevent going over.

The back-and-forth in recent weeks has primarily been of concern to businesses, where confidence has eroded. Some slowing in economic growth due to the impasse is expected, but that may play into the hands of value investors if the market corrects in coming months.

"It appears as though politics will dominate for some time," said Richard Bernstein, chief executive of Richard Bernstein Advisors in New York. "That being said, equity market valuations already reflect this ... the stock market is attractive from my perspective."

Stock markets around the world were closed Tuesday because of New Year's Day. Some Republicans in the House had expressed concern on Tuesday afternoon that a bill would not be finished before U.S. markets open.

Many traders will still be away from their desks because of the holiday, indicating trading volume will stay near its recent low levels. The anemic action, coupled with uncertainty over the cliff, resulted in a spike of volatility in December, with the CBOE Volatility index jumping 13.5 percent in the month.

DEBT CEILING BATTLE REMAINS

The bill that passed does not contain the kind of spending cuts that many conservative Republicans favor in order to bring down the high U.S. federal debt.

Even as this battle recedes, markets will look ahead to another fight in the next few months, this time over whether Congress will approve an increase in the U.S. debt ceiling.

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

"The spending side fight looms and it will be tougher," said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida. "The Republican caucus is tighter on that side."

Markets posted several days of sharp losses in the period surrounding the fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Economists at Goldman Sachs, in a note Tuesday, said the coming fight to raise the debt ceiling -- where Republicans are likely to demand spending cuts while President Obama pushes for more taxes -- "is likely to be at least as politically difficult as the last increase was in the summer of 2011."

During this fight, the markets have been less volatile, largely because the effects of the spending cuts and tax hikes will be gradual, and there was an ongoing expectation that a retroactive fix was in the offing.

(Additional reporting by David Gaffen, David Randall, Chuck Mikolajczak and Richard Leong; Editing by Neil Fullick and Paul Tait)

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U.S. fiscal cliff deal prompts broad rally

1 of 7. The London Stock Exchange is seen during ther morning rush hour in the City of London April 11, 2011.

Credit: Reuters/Toby Melville

By Marc Jones

LONDON | Wed Jan 2, 2013 3:43am EST

LONDON (Reuters) - European shares, oil and gold rose strongly on Wednesday after U.S. politicians struck a long-awaited deal to avoid a fiscal crisis, while safe-haven dollar and German government bonds fell.

Lawmakers approved a plan to prevent huge tax increases and delay spending cuts that together would have pushed the world's largest economy off the "fiscal cliff" and into a likely recession.

European markets followed their Asian counterparts and rallied on the news, while futures markets pointed to Wall Street doing the same.

London's FTSE .FTSE, Frankfurt's DAX .GDAXI and CAC 40 .FCHI in Paris opened between 1.4-1.9 percent higher, pushing the pan-European FTSEurofirst 300 .FTEU3 up 1.3 percent and the MSCI world index .MIWD00000PUS 0.8 percent.

"This is great news for global growth and explains why shares and other growth-related assets are up strongly today," said Shane Oliver, strategist at AMP Capital.

Although the U.S. deal is not as far-reaching as markets had wanted, Tuesday's approval by the House of Representatives of a plan already backed by the Senate allayed fears that Republican objections to the heavy emphasis on taxes rather than spending cuts could have scuppered an agreement.

Assets which are traditionally see as more risky rose across the board with crude oil futures up 1.1 percent, gold gaining $7 an ounce and copper futures in London up 1.7 percent.

In currency markets the euro rose to $1.3281 as the dollar fell 0.5 percent against a basket of major currencies .DXY.

The Japanese yen also continued its slide, hitting its lowest level since July 2010, as investors bet that the Bank of Japan would have to take ever-more aggressive easing steps to support the economy and satisfy the new government.

The pattern was the same for bonds, where prices of higher-yielding Spanish and Italian government bonds rose and the German equivalent, usually favored by risk-averse investors, fell. The Bund future was last 89 ticks down at 144.75.

"The compromise is supportive for risk sentiment as we've seen in a few markets already and it should weigh on Bunds which should correct in line with (U.S.) Treasuries. Treasuries could even underperform," said Rainer Guntermann, a strategist at Commerzbank.

(Reporting by Marc Jones; editing by David Stamp)

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Wall Street ends 2012 riding high on "cliff" deal optimism

Traders work the floor at the New York Stock Exchange in New York, December 26, 2012.

Credit: Reuters/Eduardo Munoz

By Chuck Mikolajczak

NEW YORK | Tue Jan 1, 2013 9:27am EST

NEW YORK (Reuters) - U.S. stocks closed out 2012 with their strongest day in more than a month, putting the S&P 500 up 13.4 percent for the year, as lawmakers in Washington closed in on a resolution to the "fiscal cliff" negotiations.

The S&P 500's gain for the year marks its best performance since 2009, as stocks navigated through debt crises in Europe and the United States that dominated the headlines. Still, with numerous issues involving budget talks unresolved, markets could still be open to a shock should the deal break down unexpectedly.

Fittingly, in the last session of the year, stocks bounced back and forth on the headlines out of Washington, as both President Barack Obama and Republican Senate leader Mitch McConnell issued statements indicating a deal to avert the cliff was close.

"The worst news could have been the president coming out and saying, 'We don't have a deal and we've giving up,' and he didn't say that," said Ron Florance, managing director of investment strategy for Wells Fargo Private Bank, based in Scottsdale, Arizona.

"My personal skepticism, I don't trust anything out of Washington until it is signed, sealed and delivered, and it is not signed, sealed and delivered."

While a deal on the cliff is not yet official, investors may be ready to take on more risk next year in hopes of a greater reward.

McConnell said an agreement had been reached with Democrats on all of the tax issues in the potential deal, removing a large hurdle in the talks. An agreement is needed in order to avert a combination of tax hikes and spending cuts that many believe could push the U.S. economy into recession.

A source familiar with the matter said an emerging deal, if adopted by Congress and President Barack Obama, would raise $600 billion in revenue over the next 10 years by increasing tax rates for individuals making more than $400,000 and households earning above $450,000 annually.

Despite the uncertainty, the market encountered only occasional bouts of volatility this year. For the first time since 2006, the CBOE Volatility Index or VIX .VIX, the market's favored indicator of anxiety, did not surpass the 30 level, a threshold that usually signals heightened worry among investors.

"Given all the threats in 2012, the VIX was relatively tranquil," said Bill Luby, the author of the VIX and More blog in San Francisco, citing the crises in Spain and Greece, along with constant intervention from the Federal Reserve.

The Dow Jones industrial average .DJI gained 166.03 points, or 1.28 percent, to end at 13,104.14. The Standard & Poor's 500 Index .SPX gained 23.76 points, or 1.69 percent, to finish at 1,426.19. The Nasdaq Composite Index .IXIC gained 59.20 points, or 2.00 percent, to close at 3,019.51.

Monday's gains enabled the S&P 500 to snap a five-day losing streak, its longest skid since September.

The S&P 500 closed out 2012 with a 13.4 percent gain for the year, compared with a flat performance in 2011. The Dow rose 7.3 percent in 2012 and the Nasdaq climbed 15.9 percent.

Financials .GSPF were the strongest of the S&P's 10 industry sectors this year, gaining more than 26 percent, led by Bank of America (BAC.N), which more than doubled in 2012, and was the best performer of the Dow industrials.

Of the S&P's 10 sectors, only defensively oriented utilities .GSPU ended the year lower, falling 2.9 percent.

Gains in Apple Inc (AAPL.O), the most valuable U.S. company, helped lift the Nasdaq. The stock rose 4.4 percent to $532.17, lifting the S&P information technology sector index .GSPT up 2.2 percent. For the year, Apple rose 31.4 percent, ending with a market value of about $501.4 billion.

Each of the Dow's 30 components finished the session in positive territory, led by a 3.2 percent climb in Caterpillar Inc (CAT.N) to $89.58.

Volume was modest, with about 6.06 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, slightly below the daily average of 6.42 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of 6 to 1, while on the Nasdaq, four stocks rose for every one that fell.

(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)

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Analysis: "Fiscal cliff" deal called a dud on deficit front

Speaker of the House John Boehner (R-OH) arrives at the U.S. Capitol in Washington January 1, 2013. The Senate moved the U.S. economy back from the edge of a ''fiscal cliff'' on Tuesday, voting to avoid imminent tax hikes and spending cuts in a bipartisan deal that could still face stiff challenges in the House of Representatives.

Credit: Reuters/Mary F. Calvert

By Kim Dixon

WASHINGTON | Tue Jan 1, 2013 7:05pm EST

WASHINGTON (Reuters) - In the controversy surrounding the "fiscal cliff" issue, it's easy to forget that the origin of the entire debate was a professed desire to reduce swollen federal deficits.

Whether the target was $4 trillion over 10 years, as proposed by the Bowles-Simpson deficit reduction commission, or in the $2 trillion range, as tossed around by House of Representatives Speaker John Boehner and President Barack Obama, the idea was to rein in total debt that now tops $16 trillion.

By those standards, the bill passed by the U.S. Senate early on New Year's Day to avoid the cliff's automatic steep tax hikes and across-the-board spending cuts, looks paltry indeed.

The legislation, which as of Tuesday evening had yet to be passed by the House, would add nearly $4 trillion to federal deficits over a decade compared to the debt reduction envisioned in the extreme scenario of the cliff, according to the non-partisan Congressional Budget Office.

This is largely because it extends low income tax rates for nearly every American except the relative handful above the $400,000 threshold.

It's also because it put off for at least two months the automatic budget cuts that were part of the cliff and would have saved about $109 billion in federal spending on defense and non-defense programs alike.

The Senate bill, which ultimately came down to a fight about tax equity rather than federal spending, did to deficit reduction what Obama and congressional leaders always promise to resist: It "kicked the can down the road" to a later date.

In explaining the measure to the news media, the White House, which helped broker it, gave no particular figure for how much it would bring down the deficit, stating only that, somehow, "with a strengthening economy," it would.

Whether it ultimately succeeds will depend in part on what happens to the now-delayed "automatic" spending cuts, including whether Obama follows through on reductions in outlays.

FULL CIRCLE

The Senate bill also sets up what is likely to be an even more heated fight in late February when the Treasury Department must come to Congress to seek an increase in the government's borrowing limit.

That will bring everything full circle to where the cliff originated during a struggle between Obama and Republicans over raising the federal debt ceiling above $14.5 trillion.

That struggle ended in August, 2011 with a bipartisan deal designed to scare Congress into legislating significant long-term cuts in federal spending.

The idea was that by setting a strict deadline of January 2, 2013 and dire consequences in the form of draconian spending cuts for failing to meet it, the White House and Congress would be forced into action.

Republican Representative Paul Ryan, a self-described deficit hawk who served as the Republican vice-presidential candidate, declared the moment a "huge cultural change."

Coincidentally, low tax rates that originated during the administration of President George W. Bush were also set to expire on December 31, making the prospect of inaction so threatening that the Congressional Budget Office determined that failure to intervene could cause a new recession.

But the controversy over taxes, coming on the heels of a presidential campaign built around Obama's demand for middle-class tax justice, ultimately consumed the argument over the cliff, leaving deficit reduction as the forgotten issue.

Among those disappointed by the process was Alice Rivlin, a Brookings Institution scholar, former U.S. budget director and co-author of another widely discussed deficit reduction plan named for herself and former U.S. Senator Pete Domenici, a Republican from New Mexico.

"I'd been optimistic," Rivlin said in an interview with Reuters. "I thought that we might get might get it done" and that Boehner and Obama "might get to a grand bargain."

Maya MacGuineas, a budget hawk who has led a group of corporate chieftains in a group called "Fix the Debt," was also unenthusiastic about the bill.

"This is one of the lowest common denominator deals," MacGuineas said. "I wish I had something nice to say, but not so much."

(Reporting By Kim Dixon, Rachelle Younglai, David Lawder and Richard Cowan and Fred Barbash; Editing by Fred Barbash and Eric Walsh)

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