Dim hopes that new U.S. panel can reach grand bargain on budget

By David Lawder WASHINGTON (Reuters) - Washington's last-minute deal to reopen the government and avert a default sets up the latest congressional committee to try to reach a budget compromise, but some lawmakers say the panel faces an extremely difficult task. The deal that passed late on Wednesday, just hours before the U.S. Treasury was due to hit its debt limit, does nothing to resolve the bitter differences between Democrats and Republicans over taxes and spending that have provoked several tense standoffs in recent years, setting financial markets on edge. Instead, it leaves decisions on how to shrink budget deficits and replace automatic "sequester" spending cuts to a negotiating panel known as a conference committee. The group of Democrats and Republicans from the Senate and House of Representatives is expected to start working in coming days and would have to report recommendations by December 13. While there are no prescribed consequences if the committee fails to agree on recommendations, government funding runs out again on January 15, and the threat of another federal shutdown will put pressure on lawmakers for a deal. On the other hand, such committees do not have a great track record. Washington has seen numerous deficit commissions and negotiating "gangs" and "supercommittees" fail, most notably after the budget deal in 2011. It is difficult for many in Washington to see how things will be different this time. "The truth is, time will tell," said Representative Gregory Meeks, a Democrat from New York. "I don't know that it's going to be any different. I hope so." Disastrous poll numbers for Republicans and worsening public views of Democrats over the two-week shutdown could help lawmakers be more flexible, he said, adding, "Hopefully, we're not deaf and we hear it." The committee is expected to unofficially start negotiations on Thursday morning when House Budget Committee Chairman Paul Ryan of Wisconsin and his Democratic Senate counterpart, Patty Murray of Washington state, meet for breakfast. They will turn the event into a photo opportunity and news conference. "There's concern that remains because we know that we're going to face this again in a matter of months, if not weeks," said Representative John Larson, a Connecticut Democrat. He voiced hope that the focus of talks can be "on important things, like jobs." DEEP DIVISIONS While both sides agree that deficits must shrink further, entrenched partisan positions will be difficult to break. The Congressional Budget Office has said about a further $2 trillion in 10-year budget savings are needed to stabilize U.S. debt as a percentage of economic output over the long term. Republicans want spending cuts to come from expensive federal benefit programs such as Medicare and Social Security, but liberal Democrats have strongly resisted that. They would prefer to raise taxes further on the wealthy by eliminating some tax breaks, but that is a non-starter for most Republicans, who want to use those savings to lower tax rates. Democrat Sander Levin, the top Democrat on the House Ways and Means Committee, said there must be compromise in which his party gets some sort of new tax revenues in exchange for cuts to benefits. "So I think we're going to insist on balance," he told Reuters. "And if we're going to talk about entitlements, we're going to have to talk about revenues." Republicans will also fight to preserve the savings from across-the-board "sequester" spending cuts ordered by the 2011 Budget Control Act, without raising taxes. Senate Republican leader Mitch McConnell, who hammered out the debt limit and funding deal with top Senate Democrat Harry Reid, underscored that point on Wednesday. "Some have suggested that we break that promise as part of this agreement. They've said Washington needs to spend more, that we need to raise taxes — that we can just tax our way to prosperity and balance," McConnell said. "But what the BCA (Budget Control Act) showed is that Washington can cut spending." OBAMACARE FIGHT NOT OVER Some Republican conservatives said they planned to use the talks to renew their failed effort to defund and delay implementation of President Barack Obama's signature healthcare law, popularly known as Obamacare. "As the nation's attention turns from Washington politics to the Obamacare disaster, Democrats will have no choice but to reconsider our fair and reasonable proposals to delay the law," said Representative Tom Graves of Georgia, who spearheaded an effort to defund the measure in the House. House conferees were named following the chamber's vote, and the lineup had some partisan voices on it from each party, which could make for contentious negotiations. Republicans will be led by Ryan, the architect of the party's fiscal blueprints, which call for deep cuts to benefit programs and social services. The panel also includes Representative Tom Price of Georgia, a leading conservative voice, and more moderate Republicans - Tom Cole of Oklahoma and Diane Black of Tennessee. The presence of Ryan, considered a top contender for the 2016 Republican presidential nomination, is a significant change from the 2011 supercommittee. Ryan, last year's Republican vice presidential nominee, declined to serve on that panel after predicting it would fail to meet its goal of finding $1.5 trillion in budget savings. This year, Ryan has downplayed expectations for a "grand bargain," advocating instead more modest savings that he calls a "down payment" on reducing the federal debt. On the Democratic side is Assistant Democratic Leader James Clyburn, who was a member of the 2011 supercommittee who argued strenuously against benefit cuts. Also on the panel is Representative Chris Van Hollen, the top Democrat on the Budget Committee and Representative Nita Lowey, top Democrat on the House Appropriations Committee. (Reporting by David Lawder; Editing by Karey Van Hall and Peter Cooney)