By Andy Sullivan
WASHINGTON (Reuters) - The threat of a government shutdown seemed to recede on Wednesday as budget talks between Republicans and Democrats resumed in Congress and aides from both parties said they were more optimistic that a compromise can be found.
Though lawmakers continued to trade jabs in public, aides said privately that they had a greater sense of optimism they could reach a deal before temporary government funding expires on April 8.
"We're all focused on getting something enacted into law," a Republican aide said.
Both parties acknowledge the need to trim budget deficits that have hovered around 10 percent of GDP in recent years, but differ on how to do this.
Republicans hope to keep a campaign promise to scale back the government, while Democrats say that sharp spending cuts would hurt the economic recovery.
"We know the answer lies in the middle. Neither party can pass a budget without the other party," Senate Democratic Leader Harry Reid said.
The two sides were initially $50 billion apart in the debate over spending levels for the current fiscal year that ends September 30. Democrats say that gap has now been reduced to only $6 billion as they struggle to finalize more than $1 trillion in annual spending.
That would amount to a reduction of between $30 billion and $40 billion from current levels, making it the largest domestic spending cut ever.
"This is a huge victory for congressional Republicans whose budget cuts were scoffed at by the White House and Senate Democrats when they began these negotiations in January," wrote MF Global analyst Chris Krueger in a research note.
WHERE TO CUT?
But lawmakers must also agree on where the cuts would take effect. Republicans in the House of Representatives have attached dozens of restrictions to their budget bill that would prevent President Barack Obama from implementing everything from his signature healthcare reform to raising pay for foreign service employees. That has drawn a veto threat from the White House.
Republican leaders also must determine whether any deal will fly with rank-and-file members. House Speaker John Boehner, in particular, faces pressure from the conservative Tea Party movement, which helped his Republicans win control of the House last fall.
Tea Party groups plan a rally at the Capitol on Thursday, and many newly elected lawmakers are eager to deliver a win on the issue that brought them to Washington, despite a new CNN poll that shows support for the movement has eroded among voters as a whole.
Some 54 House Republicans voted against a stopgap bill to keep the government running earlier this month, and many have said they won't back a final bill that does not block healthcare reform or contain other elements that would be sure to draw a veto from Obama.
Boehner could opt to pass a bill with the support of moderate Democrats, who on Wednesday unveiled their own deficit-reduction plan that includes significant spending cuts. But leaders of that group said they had not talked with Republicans about a deal for the current fiscal year.
Republican aides emphasized that they are aiming for a deal that can keep most of their party on board.
Meanwhile, Republicans kept up the pressure.
House Republican Leader Eric Cantor unveiled a bill that would suspend lawmakers' pay if a shutdown were to take effect. The House is scheduled to vote on it Friday, he said.
(Editing by Philip Barbara)