A Congressional committee has reached a compromise agreement on extending payroll tax cuts and unemployment benefits until the end of 2012, avoiding another year of short-term extensions and giving relief to cash-strapped Americans.

Max Baucus and Dave Camp, the Democratic senator and Republican representative leading the bipartisan negotiations, announced in the early hours of Thursday that they had agreed a deal on all the main issues, and that it would win enough support to pass in both chambers.

Both developments are good news for President Barack Obama, who hopes that extending the tax cuts and jobless benefits will stimulate consumption and keep the economy growing as the November election approaches.

It also helps Republicans to counter criticism they are being obstructionist.

The deal “is a fair agreement and one that I support”, said John Boehner, Speaker of the House of Representatives. He could bring a vote on the deal as soon as today.

A 2 percentage point cut in the 6.2 per cent Social Security payroll tax rate – worth $40 a week for the average US family – is due to expire on March 1, as are benefits for the long-term unemployed, unless Congress passes fresh legislation. Previous agreements have come at the 11th hour and offered only a short-term solution.

But under this bipartisan deal, forged in the early hours of Thursday, both measures will be extended until the end of 2012.

The breakthrough came after the Republican leadership in the House made a surprise about-turn, dropping its demand that the $100bn tax cut extension be paid for with spending cuts elsewhere. That amount will instead be added to the deficit.

The $30bn cost of extending unemployment benefits will be offset by broadcast spectrum auctions and the requirement that public sector workers pay more into their pension funds.

Republicans did, however, chalk up some victories. The current maximum unemployment coverage of 99 weeks will be reduced to 73 weeks in the worst-hit states by the autumn, but in most states it will be scaled back to 63 weeks.

The bill will benefit 160m workers and several million unemployed Americans, a key part of Mr Obama’s plan to stimulate consumption and keep the economy growing as the November general election approaches.

“It’s a very good deal for the country,” Mr Baucus, chairman of the Senate finance committee, told reporters.

Benefits for the long-term unemployed will also be extended for 10 months, at a cost of $30bn, although Republicans chalked up a victory here. The current maximum coverage of 99 weeks will be reduced to 73 weeks in the worst-hit states by the autumn, but in most states it will be scaled back to 63 weeks.

Republicans won the inclusion of a provision that will authorise states to make unemployment beneficiaries submit to drug tests.

The negotiators also agreed to pass the “doc fix”, stopping a 27 per cent reduction in reimbursements to doctors who treat elderly patients under the Medicare system, carrying a $20bn price tag.

The measures will be offset in part by broadcast spectrum auctions, potentially raising $15bn, and requirements that public sector workers pay more into their pension programmes, raising another $15bn.

The benefits are due to expire on March 1 unless the new bill is passed by Congress, but hurdles remain.

There are still “technical issues” to be resolved and the deal needs to be written into legislative language, Mr Baucus and Mr Camp said.

There is also significant opposition to the compromise agreement. Fiscally conservative Tea Party members in the House object to the deficit being extended, while some Democrats are not happy that federal workers will share some of the burden.

John Boehner, the House speaker, signalled that he would bring the bill to a vote this week. A vote is expected as soon as Friday, but could be called on Saturday if there are delays. Congress will be in recess next week.

Mr Obama had earlier in the week urged Congress to act swiftly to ensure that middle class families did not face increased costs while the economy remained in trouble and petrol prices were rising.

“We can settle for a country where a few people do really, really well and everybody else struggles just to get by, or we can restore an economy where everybody gets a fair shot and everybody is doing their fair share and everybody is playing by the same set of rules,” Mr Obama said.

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