WASHINGTON (Reuters) - Washington took some tentative steps toward confronting its looming fiscal threats on Tuesday with a deal in Congress to neutralize the risk of a government shutdown that could upset voters ahead of the November 6 elections.
The White House said it would shield U.S. military pay from automatic budget cuts due to take effect in January -- a move that could shift more of the reductions onto defense contractors. It also instructed agencies to begin preparing for some across-the-board cuts.
The top Republican and Democrat in Congress struck a deal to extend funding for federal government agencies and discretionary programs through March 2013, calling a truce in at least part of Washington's multi-front battle over taxes and spending.
The six-month spending extension, announced by Republican House of Representatives Speaker John Boehner and Democratic Senate Majority Leader Harry Reid, will fund programs from defense education to medical research at an annual rate of $1.047 trillion, the level specified in a debt-limit deal last year.
The full House and Senate would still need to approve the measure by September 30, the end of the current fiscal year, when funding runs out. Congress will be in recess most of August and the first week of September.
If passed by Congress, the deal for a six-month spending extension eliminates one layer of difficult year-end wrangling for Congress just after the election as it deals with the "fiscal cliff" of expiring tax cuts, automatic spending cuts, a debt-limit increase and other fiscal deadlines.
Economists say inaction by lawmakers would unleash tax increases and budget cuts that would crush recovery and throw the economy back into recession next year.
"This agreement reached between the Senate, the House and the White House provides stability for the coming months, when we will have to resolve critical issues that directly affect middle class families," Reid said in a statement.
"I hope that we can face the challenges ahead in the same spirit of compromise," he added.
Congress has made virtually no headway in averting the $109 billion in across the-board spending cuts that loom in January. On Tuesday, Jeffrey Zients, acting White House budget director, took the widely anticipated step of exempting military personnel accounts from the cuts.
"This step was taken because the administration believes it is in the national interest to safeguard the resources necessary to safeguard the men and women serving to defend our nation and to maintain the force levels required for national security," an administration official said.
The military, however, is still expected to bear half of the anticipated cuts -- nearly $55 billion -- so weapons programs and other activities could be hit harder.
The six-month spending deal marks a major tactical shift for House Republicans, who have spent much of the past two years using government funding deadlines as leverage to demand deeper spending cuts. Bitter deficit reduction standoffs last year, driven largely by fiscal conservatives, threatened several government shutdowns and brought the United States to the brink of a historic debt default.
But this year, with presidential and congressional elections looming in just over three months, Republicans want to avoid a repeat that could stir up voter backlash against Republican presidential candidate Mitt Romney and the party's drive to regain control of the Senate.
By immunizing Congress against a shutdown threat, Republicans feel they can keep the campaign focus on the weak economy.
"That's where Republicans win and Democrats lose," said a Republican House leadership aide.
But Democrats will get to tout that they have protected programs important to their core supporters, including food stamps and healthcare programs, from deeper spending cuts.
The stop-gap spending measure is needed because Congress' normal process for passing bills to fund the government has broken down amid bitter partisan battles over funding levels.
House Republicans had sought about $19 billion in extra spending cuts next year, which had been strongly opposed by Democrats, raising the risk of a government shutdown on October 1.
The fiscal conservatives who had been Republicans' driving force behind these cuts so far appear to be going along with the Boehner-Reid agreement.
They view the higher $1.047 trillion funding level as the price needed for a six-month agreement that pushes spending decisions into the next Congress -- one they believe will be fully controlled by Republicans, with Romney having replaced President Barack Obama in the White House.
"We'll swallow hard and accept that number as long as it's a six month" extension, said Representative Jeff Duncan, a freshman Republican.
But it will take Congress the better part of two months to write and pass the spending extension legislation -- plenty of time for the deal to potentially unravel.
The arrangement drew a sharp rebuke from the Tea Party Patriots group, which vowed to hold congressional leaders accountable for their "reckless, irresponsible behavior" in sustaining high spending levels.
"We will not forget in November and beyond," said the group's founder, Jenny Beth Martin.
Additional reporting by Kim Dixon; editing by Will Dunham and Mohammad Zargham