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Obama, Congressional Leaders Have Days to Craft Fiscal Deal

U.S. President Barack Obama returns to Washington Thursday to resume difficult negotiations with congressional leaders to avert or postpone tax increases and mandatory government spending cuts at the end of the year.

Curtailing what was to have been a two-week vacation with his family in Hawaii, Obama will assess progress made by lawmakers and his own aides toward achieving this goal he set last Friday.

"To work towards a package that prevents a tax hike on middle class Americans, protects unemployment insurance for 2 million Americans, and lays the groundwork for further work on both growth and deficit reduction." Obama said.

The president has said he remained hopeful about the possibility of achieving a larger comprehensive deficit reduction package. But chances for this appear exceedingly slim.

That leaves the most likely scenario: a measure in the Democratic-controlled Senate to extend tax cuts for families earning $250,000 or less, adding extended benefits for unemployed Americans, and a mechanism to temporarily avoid $109 billion in government spending cuts.

Any Senate-passed measure would have to win the support of at least 26 Republicans and all 191 Democrats in the House of Representatives. House Speaker John Boehner faced a rebellion last week by anti-tax Republicans who blocked his alternative plan to raise taxes on Americans earning $1 million or more.

In a statement Wednesday, Boehner said it is up to the Senate to act, adding that "lines of communication" remain open.

Stephen Hess, an analyst with the Brookings Institution, says he believes a deal will emerge.

"Something is bound to go through. The Congress may have awful problems, but they are not going to set off a recession, which is what would happen if they couldn't reach agreement on taxes, and also on the huge cuts that are guaranteed to start immediately with the new year as well," Hess said.

An alternative scenario would have lawmakers return in January to reverse tax increases and further delay mandatory government spending cuts. Republicans could then say they voted only to decrease tax rates.

Without a deal, tax cuts approved by Congress under former Republican President George W. Bush -- which were temporarily extended in 2010 by President Obama -- would expire January 1.

Hess observes that so far, financial markets have been remarkably quiet as politicians struggle to forge a deal.

"There has been a wait and see attitude in the markets. It has been a year, 2012, in which generally the American markets have done well, so there is a little wiggle room there, and they have not chosen to follow th­e politicians over the cliff -- yet," Hess said.

Princeton University economist Alan Blinder is concerned about the impact on the U.S. economy when leaders are unable to reach a compromise.

"An economy which was just limping out of the worst recession since the 1930's, then gets another body blow, sees its government act like a bunch of clowns, may see borrowing costs go up because of lack of confidence in the financial markets," Blinder said.

According to a recent poll, Americans watching the Washington power struggle play out are more pessimistic than they were about chances for a deal.

A Gallup Poll conducted before Christmas showed just 50 percent believe a deal to avert the fiscal cliff is likely, a sharp decrease from several weeks ago. Forty-eight percent said they were doubtful an agreement can be reached.