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Election over, Obama faces fresh challenge with "fiscal cliff"

Buttons with portraits of U.S. President Barack Obama lie in a glass bowl during the U.S. election night at the representation of the Bertel
Buttons with portraits of U.S. President Barack Obama lie in a glass bowl during the U.S. election night at the representation of the Bertel

By Kim Dixon

WASHINGTON (Reuters) - Barack Obama won re-election on Tuesday night, but the president faces a fresh challenge confronting the "fiscal cliff," a mix of tax increases and spending cuts due to extract some $600 billion from the economy barring a deal with Congress.

At stake are two separate issues - individual tax cuts due to expire at year's end and tens of billions of dollars in across-the-board federal spending cuts due to kick in the day after New Year's Day.

Failure to prevent a dive off the cliff could rattle U.S. markets, and push the U.S. economy into a recession, which could have global implications. How Obama fares with a familiar set of challenges - most notably a Republican-controlled House of Representatives - could color his second term.

Obama, who defeated Republican challenger Mitt Romney based on television projections, will want to strike a deal with Washington lawmakers before December 31 or risk a recession in the first half of 2013, budget experts and Democratic aides say.

His backers say his win gives him a mandate for an elusive "grand bargain" he sought in his first four-year term. Such a pact would raise new revenue, make changes to popular programs like the Medicare health program for the elderly and pare the federal deficit.

"They have signaled that they want a big deal and I think Obama will be aggressive about getting it," said Steve Elmendorf, a former House Democratic senior adviser and now a lobbyist.

AT ODDS

Obama and most Democrats are at odds with Republicans in Congress over the stickiest issue - whether to let low tax rates for the wealthiest Americans expire on December 31.

The president and most Democrats want to raise taxes on income earned above $250,000; Republicans want to extend the current low rates for all income levels.

Financial markets and the business community crave long-term certainty - and that is what a major deal envisioned by Obama is intended to tackle.

A big X-factor is how congressional Republicans will respond to an Obama win. The hard line against raising revenue taken by many Republicans in the House may not abate after the election.

House Speaker John Boehner said this week that his Republicans would stand firm on their position opposing any tax increases, even for millionaires, though he was speaking before the election results.

Republicans kept control of the House, as expected, and Democrats were projected to maintain control of the Senate.

An Obama victory "takes a lot of air out of the room for Republicans," Jim Walsh, a former Republican representative, who retired in 2009, predicted before the election. The odds of a grander deal with increased revenue - though not in the form of higher tax rates - goes up with an Obama victory, he said.

Former Democratic representative Bart Gordon was unsure whether more conservative elements of the party, associated with the Tea Party movement, would go along so easily. "Those folks don't need much of a reason to fight," Gordon said.

(Editing by Howard Goller and Paul Simao)

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