Rivals take up battle stations for next phase of fiscal war Having just emerged from a bruising fiscal battle, the thought of another confrontation will be filling many US lawmakers, the public and investors around the world with dread. But the next phase in the US's fiscal war begins on Wednesday, when 29 members of a budget conference committee will meet on Capitol Hill to try to forge a deal to fund the government for the rest of the fiscal year to September, and remove the threat of another government shutdown in early 2014. The stakes are high for the world's largest economy and financial markets, shaken by a level of political instability that threatens global growth at a time when the US Federal Reserve is weighing when to start scaling back its massive monetary stimulus. What needs to be achieved? The bipartisan group must reconcile the vastly different budget proposals produced in the Democrat-controlled Senate and the Republican-controlled House. The committee has until December 13 to negotiate a deal. But there has not been a fiscal year budget agreed by Congress since April 2009, resulting in countless last-minute deals to continue funding the government for months at a time at the same levels. Partly because of their own internal divisions, but partly because they did not believe it was worth the effort, Senate Democrats did not even bother passing their own budget in the upper chamber from 2010 until this year. With Senate and House budgets both in place, this is the first time in more than four years that a formal budget process has been launched, offering optimists a glimmer of hope. Can a compromise be found this time? Finding a middle ground for the whole budget would be a quixotic task. The House Republican proposal aims to balance the budget in 10 years with deep spending cuts and no tax increases. The Senate Democratic budget includes nearly $1tn in higher taxes over a decade, with more modest spending cuts and no goal for a balanced budget. So the panel's leaders have set a very limited goal aiming to agree on a target for "discretionary spending" alone - the chunk of the budget that funds government agencies and is renewed annually. This category represents less than one-third of annual federal spending of $3.5tn, eclipsed by government pension, healthcare, and safety net programmes that are essentially on autopilot and do not need to be renewed every year. This year "discretionary" spending is set at $986bn, but in 2014, after automatic cuts known as "sequestration" take another $19bn bite out of it in January, the amount will drop to $967bn. This is unacceptable to most Democrats and even some Republicans worried about its impact on the Pentagon. Each have a plan to ease the pain on the discretionary side and shift it elsewhere. But if they cannot come up with a deal, it could lead to a new government shutdown when funding runs out on January 15. And it could poison the environment ahead of a new deadline to raise the US borrowing limit or avoid default by February 7. Where do the compromises lie? The basic trade-off on the budget has always been that if Republicans agree to raise taxes on the wealthy, Democrats will agree to some long-term cuts to big social programmes such as Medicare and Social Security. But that deal remains elusive. So any smaller deal to raise the discretionary spending level and offer relief from "sequestration" will have to come from modest changes to other parts of the budget, such as curbing farm subsidies, federal employee retirement plans, food stamps and other healthcare savings. A more ambitious agreement might include a shift to a less generous measure of inflation known as "chained CPI" for pension payments, or raising Medicare premiums for the wealthy, and the elimination of some tax breaks for oil companies and the profits of private equity and hedge fund managers, known as carried interest. But those may be a stretch, given each would elicit protests from the liberal and conservative bases. Who will be negotiating the deal? Personal and political dynamics among the 29 members - co-chaired by House Republican Paul Ryan and Senate Democrat Patty Murray - will be key to whether a deal can be reached. Both are experienced legislators and influential voices on budget policy, so if they reach a deal, they should be able to drag their fellow party members along. But there is no guarantee they will manage even minor compromises. Republicans may continue to balk at even minor revenue increases. And even if Democrats drop their demands for higher taxes, Republicans may not accept whatever new spending cuts Democrats put on the table. Behind the scenes, a key question will be whether congressional leaders, rank-and-file members of both parties and the White House will be rooting for a deal, and nudging Mr Ryan and Ms Murray towards an agreement, or if they will be quietly working against it.