updated 5/11/2007 8:01:18 AM ET 2007-05-11T12:01:18

A Democratic budget blueprint taking shape in House-Senate talks would balance the federal ledger within five years, promising higher spending but also expiration of many of the tax cuts passed in President Bush's first term.

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Negotiators formally opened talks Thursday, but Democrats have been meeting privately for weeks. They hope to have a compromise ready for House and Senate votes next week.

The emerging plan would award generous spending increases next year to both the Pentagon and domestic agencies, but puts off difficult decisions about unsustainable growth in federal benefit programs such as Medicare.

'Pay as your go', middle class tax cuts
The most immediate impact of the budget resolution would be to pave the way for debate on the 12 annual bills funding the budgets of Cabinet agencies such as Defense, Education and Agriculture - and a big battle between Democrats and Bush over how much to boost funding for domestic programs.

The measure would also restore a "pay-as-you-go" rule that requires tax cuts or spending increases in benefits programs such as Medicare, children's health care or farm subsidies to be financed by spending cuts or tax increases elsewhere so as to not worsen the deficit.

The budget plan is not binding but sets goals for subsequent tax and spending bills. It makes a statement about the priorities of majority Democrats and provides an early test of the party's ability to prove it can govern.

Republicans said Democrats managed to project a balanced budget in 2012 only by assuming tax rates on income, dividends and capital gains revert to pre-Bush levels, costing taxpayers more than $200 billion in just 2011-2012.

But tax cuts aimed at the middle class could be renewed under the compromise, including provisions establishing a 10 percent rate on the first $12,000 of a couple's income, as well as relief for married couples, people with children and those inheriting large estates.

Budget and Decision 2008
As a practical matter, however, the future of the Bush tax cuts will likely be decided after the 2008 presidential election, with their fate depending on the balance of power after the election and on the fiscal outlook at that time.

Democrats said the emerging plan would bring to an end a steady string of deficits, saying about $1.8 trillion in tax cuts passed in 2001 and 2003 had helped make disappear surpluses inherited by President Bush in 2001.

"We cannot reverse in a year the fiscal course of the last six years, but we can stop digging deeper," said House Budget Committee Chairman John Spratt Jr., D-S.C.

But Republicans said those same tax cuts had helped revive the economy, producing tax revenue growth of 11 percent this year alone.

"The tax relief we passed in 2001 and 2003 has turned this economy around," said Rep. Paul Ryan, R-Wis., at Thursday's negotiating session.

In many years, Congress leaves alone difficult budget issues and focuses chiefly on annual spending bills. This is likely to be one of those years. Democrats are poised to award the Pentagon a $50 billion budget hike for core Pentagon programs, a more than 11 percent increase, and allocate $145 billion for the wars in Iraq and Afghanistan.

Democrats are on track to award domestic agencies increases of about $23 billion, or about 5 percent to domestic agencies, with big increases going to education programs and veterans medical care.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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