By Richard Cowan
WASHINGTON (Reuters) - A pair of deals struck this week by influential lawmakers, combined with a new pragmatism among Tea Party conservatives, provides clues how the "fiscal cliff" could be avoided by extending all current budget and tax policies until the new president and Congress take office in January.
In sharp contrast to the budget wars they waged last year, Tea Party activists in Congress are so far going along with the script that is now developing.
With victories in Senate primary elections in Texas and Indiana and strong signs for its candidates in other races for the November 6 elections, the Tea Party is counting on holding more seats in the Senate next year, strengthening its hand on fiscal issues once the new members are sworn in.
That could mean all the difference when lawmakers convene in November for a post-election session.
That "lame-duck" work session, possibly extending through most of December, will grapple with how best to avoid pushing the U.S. economy over the so-called fiscal cliff at year's end.
Economists say inaction by lawmakers would unleash tax increases and budget cuts that would crush the recovery and throw the economy back into recession next year.
At issue in the session are whether all income tax cuts enacted at the urging of former President George W. Bush get extended beyond their December 31 expiration, if $109 billion in across-the-board spending cuts set to be triggered on January 2 should be put off, and whether to ensure the Treasury has sufficient borrowing authority.
If this week's developments are any clue, the answers to all those questions will be yes.
On Tuesday, Senate Majority Leader Harry Reid, a Democrat, and House of Representatives Speaker John Boehner, a Republican, struck a deal to extend the current level of government funding through the first six months of the fiscal year starting October 1.
The move, if embraced by the full House and Senate next month as expected, would end any chance of an embarrassing government shutdown before the November elections.
Ethan Siegal of The Washington Exchange, a private firm that tracks Washington for institutional investors, called the tentative deal "a template" for the end-of-year dealmaking.
The same goes, he said, for a deal reached by Senate Finance Committee Chairman Max Baucus and senior Republican Orrin Hatch late on Tuesday to extend tax breaks for research and development, renewable energy initiatives and to keep middle-class taxpayers from getting hit by the alternative minimum tax aimed at the rich.
Together, those two deals were "indicative," Siegal said, that "the current leadership of Congress wants to and has the capability ... to cut short-term deals on all these issues to get past the elections, the end-of-year (deadlines) and drop them into the lap of the next Congress and the next president."
TEA PARTY EVOLVING?
Republicans took control of the House following resounding victories in the November 2010 election by Tea Party-backed candidates who campaigned on a pledge to immediately shrink the size and cost of the federal government.
The Tea Party's demands, which Boehner could not politically ignore, came as the country was still limping along after a deep economic recession.
Government shutdowns and a historic debt default were only avoided at the last minute and a shocking downgrade in U.S. creditworthiness was issued by one private rating agency.
One year later, Tea Party activists in Congress are showing some uncharacteristic patience as they abandoned, at least for now, their demands for deeper spending cuts than those called for in last August's budget deal.
"We'll swallow hard and accept that (higher) number," Representative Jeff Duncan told reporters, adding the fight would be resumed next year, when Tea Party members think they will have a fellow Republican, Mitt Romney, in the White House.
Matthew Kibbe, head of FreedomWorks, the conservative group that has been instrumental in the Tea Party's successes, said, "You have these knock-down, drag-out fights and over time you have course corrections and that shows a maturing of our influence."
With the elections still more than three months away and the outcome very much up in the air, there still is the chance that the political landscape could shift dramatically and that the tentative deals struck this week become just an errant blip.
Indeed, some still argue that taking the country over the fiscal cliff would not be that bad, as it would allow the next Congress and president to start from scratch on tax reform and spending cuts.
Jennifer Granholm, the former Democratic governor of Michigan, argued just that in a column published on Wednesday in the newspaper Politico.
STRONGER HAND IN 2013
Ironically, the Tea Party, which has driven the fiscal debate in Washington for the past two years, now sees little to lose by cooperating with a stay-the-course approach to the end-of-year decision making.
For one thing, Tea Party candidates are winning primary elections. The latest triumph came on Tuesday when come-from-behind candidate Ted Cruz won the Republican U.S. Senate nomination in Texas with the support of Sarah Palin, among others, defeating Lieutenant Governor David Dewhurst. He is considered the likely victor in November's general election.
In May, conservative Richard Mourdock defeated veteran Senator Richard Lugar in Indiana's Republican primary.
More moderates in both political parties are vanishing from Congress - most recently the surprise retirement announcement by Republican Representative Steven LaTourette.
If Tea Party activists in Congress seem more docile now in the waning days of the 112th Congress, that could change in the 113th Congress that convenes in January, especially if Republicans win the November elections.
"The election in Texas is a reminder there will be additional hard-line conservatives coming into the next Congress that may not like a compromise" on spending, said Ron Bonjean, a Republican strategist and partner in Singer Bonjean Strategies.
That could mean that Republicans leaders could again be in for a rough ride from their own rank-and-file, just like in 2011, if Congress gets down to making real decisions on taxes and spending instead of just kicking the can down the road.
At least for now, Senate Republican leader Mitch McConnell, who in the past has butted heads with the Tea Party, was dismissing the possibility of such divisions next year.
"I expect the Republican conference will be strongly united," he said in a statement to Reuters.
(Editing by Fred Barbash and Peter Cooney)