* Consensus may be forming to delay reckoning
* No agreement on Bush-era income tax cut extension yet
By Richard Cowan
WASHINGTON, Sept 21 (Reuters) - Slowly and quietly, the U.S. Congress may be arriving at a consensus on how to avoid falling off the "fiscal cliff" on Dec. 31 - by simply putting off its own deadline for most of the major year-end budget and tax decisions.
That approach would delay the day of reckoning while also allowing more time for compromise in a Congress that has battled for two years over how best to reduce huge budget deficits.
No formal agreements have been reached, however, and turning a consensus into an actual deal that avoids jolting the markets or economy will depend on the results of the Nov. 6 general election.
The "cliff" refers to the year-end deadline for the expiration of hundreds of billions of dollars worth of tax cuts and the triggering of $109 billion in across-the-board spending cuts. The non-partisan Congressional Budget Office has said the scenario could throw the country into recession.
Congress created the hazardous end-of-year deadline in August 2O11 when it agreed to a deficit deal as a way out of a deadlock over raising the U.S. debt ceiling.
In recent weeks, lawmakers of all political stripes, from conservative Republicans to liberal Democrats in the Senate and House of Representatives, have alluded to surprisingly similar hopes for the high-stakes "lame-duck" work session that will follow the November presidential and congressional elections.
They would put aside the $109 billion in "automatic" across-the-board spending cuts that otherwise would hit military and domestic programs equally.
They would make some new, possibly smaller down payments on deficit-reduction for the near-term. Then they would write a new deadline - maybe March 31 or June 30 - to come up with a grand, $4 trillion deficit-reduction program over 10 years; and devise a new method for forcing a divided Congress to act.
The entire exercise would be aimed at finding a long-term fix for U.S. fiscal problems without the jolt of indiscriminate spending cuts and tax hikes that would occur under current law.
RUNNING FOR COVER
The threat of a possible recession after such blanket spending cuts now preoccupies Washington.
Among the fearful are the big-company CEOs represented by the Business Roundtable, for example, and Ben Bernanke, the chairman of the U.S. Federal Reserve, who briefed members of Congress this week after declaring that "I don't think our tools are strong enough to offset the effects of a major fiscal shock" of the cliff.
The most vocal Democrats and Republicans in Congress have turned the floors of the House and Senate into pre-election spin rooms as each side tries to pin the blame on the other.
But a stream of ideas to delay the Dec. 31 day of doom floats through Capitol Hill brainstorming sessions.
* Liberal Democrat Dick Durbin, the second-ranking Senate Democrat, has alluded to a six-month delay, coupled with a $40 billion to $50 billion deficit-reduction down payment for the first half of the year.
* Conservative Republican Senator Lindsey Graham has touted a "mini deal" in November or December to delay decisions through March. It would contain a $20 billion deficit cut.
* Senate Budget Committee Chairman Kent Conrad, a longtime Democratic deficit hawk, said the "optimum outcome" would give Congress six more months to work out details on revamping the tax code and big government programs like Social Security and Medicare.
In the meantime, Conrad wants Congress to strike a "framework agreement" during the lame duck session on a 10-year plan for $4 trillion in deficit reduction. He also wants a deal during the lame duck session on "hundreds of billions in revenue and spending to demonstrate credibility" on deficit-reduction, as well as new enforcement procedures if lawmakers fail to act or put up procedural hurdles. It's a tall order for a short session.
* Moderate Republican Representative Steven LaTourette, who has had close ties to House Speaker John Boehner and is retiring at year's end, said: "I do think there will be a strong push by not only the (House Republican) leadership, but quite frankly the majority of Republicans, to do the big deal...by Easter (March 31)."
* A huge question for any of the plans: What happens to the Dec. 31 expiration of across-the-board income tax cuts enacted by President George W. Bush while Congress works next year on a big fiscal plan?
The Nov. 6 election likely would decide this. If President Barack Obama is re-elected and with a strong majority, it could boost his position for continuing the tax cuts, except for those families earning over $250,000.
If Republican challenger Mitt Romney wins, he is almost certain to demand a complete renewal of the Bush tax cuts, although he would not take office until Jan. 20.
"I've thought for a long time that when they finally get to ... the lame duck, that everybody will have to blink because there's not time" to tackle all the tough issues at hand, said former House Majority Leader Richard Gephardt, a Democrat who is now a lobbyist.
Gephardt, who worked on major budget and Social Security reform deals during his long congressional career, also noted that after the elections, there will be plenty of defeated or retiring members of Congress who "just don't want to spend a lot of time on this stuff."
If the outcome of the election is indecisive, a protracted end-of-year struggle could produce market fluctuations reminiscent of those in 2008 when the House of Representatives put up resistance to the financial industry bailout known as TARP.
Euan Munro, who oversees Standard Life's $27.3 billion Global Absolute Return Strategies portfolio, said his firm is braced for some political eruption later this year owing to the fiscal cliff. "We could certainly see some volatility in the stock markets, as we did with TARP," said Munro. "You need the political will to reconcile big fundamental issues like this."
In the meantime, a Congress that made deficit reduction its central theme last year is winding up with little to show in the way of actual deficit reduction.
The numbers tell the story. Federal red ink in 2009: $1.4 trillion. The 2011 deficit: $1.3 trillion. Projected 2012 deficit: $1.1 trillion.
Lawmakers' inability to get a handle on these huge deficits is largely due to their refusal to make tough decisions on taxes and big-ticket military and entitlement program spending, according to experts such as Robert Bixby, executive director of the non-partisan Concord Coalition. But it has been further complicated by the high costs of running government while the economy has been so weak.
A year-end failure by Congress could mean "the first recession that is caused by political roadblocks," Minnesota Economist Tom Stinson told the StarTribune newspaper in Minneapolis-St. Paul recently.
Attempting to put in layman's terms the potential impact of imposing "$650 billion worth of fiscal drag" on the economy, Stinson told Reuters in a telephone interview that falling off the fiscal cliff would be "roughly the equivalent of going to bed on December 31 with gasoline (prices) at $3.85 a gallon and waking up next morning with gas at $10.35 a gallon."