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Brinkmanship remains fiscal threat

Politicians may have managed to avoid driving the United States over the "fiscal cliff" with a pre-dawn vote, but higher taxes and Washington brinkmanship are likely to sap strength from the fragile economy well into 2013.

The House of Representatives passed emergency legislation to prevent deep spending cuts and even bigger tax rises from taking effect, sending the Bill to President Barack Obama to sign.

A months-long stand-off over fiscal policy has taken its toll, adding uncertainty that has discouraged consumers from spending and businesses from hiring and investing.

The fighting seems sure to persist even after the Republican-controlled House of Representatives went along with a partial fix passed by the Democratic-controlled Senate in the early hours of Tuesday. Under that plan, taxes will rise on household incomes over 450,000 dollars (278,000).

Politicians appear to have postponed tough decisions on government spending, giving themselves a reprieve from deep cuts scheduled to begin taking effect automatically on Tuesday. That sets the stage for more hard bargaining later.

Another stand-off is likely to arrive as early as February, when Congress will need to raise the 16.4 trillion-dollar (10tn) federal borrowing limit so the government can keep paying its bills. House Republicans probably will not agree to raise the debt limit without pushing spending cuts that Democrats are sure to resist.

"Even if they cut some small deal, the process and what is left undone still means there's a lot of uncertainty," said Stuart Hoffman, chief economist at PNC Financial Services Group.

The fiscal cliff itself was created to force Democrats and Republicans to compromise.

To end a 2011 stand-off over raising the federal debt limit, they agreed to a January 1, 2013 deadline to reach a broad deal over taxes and spending. If they did not, more than 500 billion dollars (308bn) in 2013 tax increases would begin to take effect, along with 109 billion (67bn) in cuts from the military and domestic spending programmes.

The sharp tax rises and spending cuts threatened to send the economy back into recession.

But negotiations to avert catastrophe have highlighted once again how far apart Democrats and Republicans are on taxes, which Republicans do not want to raise, and spending - Democrats are reluctant to cut government programmes.

Political gridlock has been rattling financial markets and shaking consumer and business confidence over the past two years.

After the earlier fight over raising the debt limit, the credit rating agency Standard & Poor's yanked the US government's blue-chip AAA bond rating because it feared that the dysfunctional political system could not deliver a credible plan to reduce the government's debt.

S&P warned that "the differences between political parties have proven to be extraordinarily difficult to bridge".

The Dow Jones industrials dropped 635 points in panicked selling the first day of trading after the S&P announcement.

Outside Washington, the economy has been getting some good news. Europe's financial crisis appears to have eased, reducing the threat of a renewed financial crisis. And the US property market finally appears to be recovering from the housing bust.

But the old worries have been replaced by new ones about political gridlock, says Joseph LaVorgna, an economist at Deutsche Bank.

The partisan divide has left businesses and consumers wondering what's going to happen to their taxes and to federal contracts.

Companies have plenty of cash, but they reduced spending on industrial equipment, computers and software from July to September, the first quarterly drop since mid-2009, when the economy was still in recession. And recruiting has been stuck at a modest level of about 150,000 new jobs per month this year.

Consumer confidence fell in December for the second straight month, according to a survey by the Conference Board, which blamed the drop on worries about the fiscal cliff. The uncertainty is also believed to have hurt holiday shopping, which grew at the slowest pace this year since 2008.

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