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Last updated: January 1, 2013 2:46 pm
The US Senate voted early on Tuesday morning to approve a bipartisan budget deal negotiated with the White House to avert the fiscal cliff after days of tense negotiations conducted in the shadow of the end-of-year deadline.
To become law, the deal will have to pass through the Republican-controlled House of Representatives.
Although the votes came after the midnight deadline, the legislation can be backdated to avoid the impact of going “off the cliff”, which would have resulted in sharp spending cuts and across-the-board tax rises.
After the Senate vote, President Barack Obama called for the House of Representatives to pass the deal.
“While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay,” Mr Obama said, Reuters reported.
John Boehner, the Republican House speaker, promised early on Tuesday morning that his members would consider the legislation once they had “been able to review it” but made no commitment to support it.
The final Senate vote for the Taxpayer Relief Act was 89-8.
Only a handful of senators from both parties voted against the compromise, negotiated by Joe Biden, the vice-president, and Mitch McConnell, the Republican minority leader.
Mr McConnell said: “I know I can speak for my entire conference when I say we don’t think taxes should be going up on anyone but we all knew that if we did nothing they’d be going up on everyone today. We weren’t going to let that happen.”
The deal, if approved by both houses, would not end the pitched fights between the White House and Democrats and Republicans over the budget, as it only addresses the tax issues on the table.
More difficult negotiations, over spending cuts, have in effect been postponed for two months.
Republicans believe they will have greater leverage to force the administration and Democrats to reduce spending during the debate over lifting the US debt ceiling, which will probably happen in February.
Tim Geithner, the Treasury secretary, announced on Monday that the US had officially hit its borrowing limits but that the Treasury has had tools to harvest enough funds to pay the country’s debts for six weeks to two months.
The Senate deal lifts tax rates for households earning more than $450,000, marking the first time conservatives have agreed to higher taxes in about two decades.
Investors were cautiously optimistic about the outlook following the deal, at least in the short term.
A Senate compromise has gone to the House of Representatives for its decision
With many markets closed for the new year holiday, analysts said they expected investors to adopt a “risk-on” mode when they reopen on Wednesday.
The prospect of a deal buoyed equity markets on Monday. The US benchmark S&P 500 recovered almost all of last week’s losses in its final trading session of the year, closing at 1,426.19, up 1.7 per cent, snapping a five-session losing streak.
But UniCredit cautioned that the two parties had only approved a “limited” deal.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said: “Two big issues remain unresolved and look [set] for fights over them in the coming months – agreed-upon spending cuts and the debt ceiling.”
Trading has been hypersensitive to headlines emerging from Capitol Hill in a thin holiday market.
All of the issues relating to the fiscal cliff – raising revenues as well as cutting spending – would not be resolved by the deal, Mr Obama said on Monday before the vote, but “maybe we can do it in stages”.
In comments that angered Republicans, Mr Obama indicated that he would demand more revenues to offset spending cuts.
“If Republicans think I will finish the job of deficit reduction through spending cuts alone,” Mr Obama said, they have “another thing coming”.
Some Republican lawmakers bristled at the president’s language. “I know the president has fun heckling Congress,” Senator Bob Corker of Tennessee told reporters, adding that “he probably lost some votes”.
In the absence of a deal, automatic tax rises and spending cuts of $600bn would kick in from Tuesday – a set of measures that threaten to tip the world’s largest economy back into recession.
Additional reporting by Stephen Foley in New York and Mary Watkins in London
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