As I first brought to you on Sunday afternoon, Harry Reid is working on a debt limit proposal that would satisfy two key Republican demands. It would sustain the dollar-for-dollar relationship between spending cuts and an increase in the debt limit, and it would not include any revenue increases. Reid made the formal announcement in a statement:

Tonight, talks broke down over Republicans’ continued insistence on a short-term raise of the debt ceiling, which is something that President Obama, Leader Pelosi and I have been clear we would not support. A short-term extension would not provide the certainty the markets are looking for, and risks many of the same dire economic consequences that would be triggered by default itself. Speaker Boehner’s plan, no matter how he tries to dress it up, is simply a short-term plan, and is therefore a non-starter in the Senate and with the President.

In an effort to reach a bipartisan compromise, we are putting together a $2.7 trillion deficit reduction package that meets Republicans’ two major criteria: it will include enough spending cuts to meet or exceed the amount of a debt ceiling raise through the end of 2012, and it will not include revenues. We hope Speaker Boehner will abandon his ‘my way or the highway’ approach, and join us in forging a bipartisan compromise along these lines.

As I surmised, the $2.7 in spending cuts would include what amounts to an accounting gimmick, scoring a drawdown from Iraq and Afghanistan in such a way that it saves $1 trillion over ten years. While that still leaves $50 billion a year to be used on those operations, I actually think it’s a good thing to put Congress on the record limiting funds.

So where would the other $1.7 trillion come from? As the New York Times reports, not from Social Security, Medicare or Medicaid. So the likely scenario is that they come from $1-$1.2 trillion of agreed-to cuts in discretionary spending, a by-product of the Biden talks; perhaps $200 billion or so from mandatory non-health spending, perhaps Ag subsidies or federal employee pensions; and the rest from foregone interest payments. There is no indication that the Reid deal would include a Catfood Commission II to deal with entitlements or tax reform.

On the other side of Capitol Hill, John Boehner was readying his bill, a two-step process which would cut about $1 trillion in spending up-front, and raise the debt limit by the same amount, and then convene a Catfood Commission II to overhaul entitlements and taxes by early next year, with the second increase in the debt limit contingent on that overhaul passing.

While the Reid plan appears to give Republicans everything they want, it’s important to note a couple things. First, almost half of it is accounting tricks. Second, it holds Medicare, Medicaid and Social Security harmless. Third, no Catfood Commission II. That doesn’t make it a good deal, it just makes it a better deal than all the others on the table. $1.2-$1.4 trillion in cuts is still a good chunk of austerity. Still unknown is how hard Reid’s spending cuts would hit in the immediate term. The economy would react badly to spending cuts in FY 2012 or 2013. They would be better backloaded. But the discretionary budget would be eviscerated by cuts of this magnitude.

Nancy Pelosi released an approving statement on the Reid plan last night, suggesting House Dems could get behind it, and aides said the President “could endorse” the plan as a fallback. Anything Obama embraces will be seen as something Republicans must reflexively oppose, so he’s holding it at arm’s length. The only thing left Obama and the Democrats are adamantly opposing is a short-term increase in the debt limit, a feature of the Boehner plan. They don’t want to go through this rigamarole again, and would prefer to extend the debt limit out past the 2012 elections.

As I’ve said repeatedly for months, joined often by Big Tent Democrat, the debt limit deal was lost in December, when the Bush tax cuts were extended without dealing with it. There was always going to be a massive turn to spending cuts, because the tax extension blew another hole in the budget. It was the Norquist strategy of starving the beast, and drowning government in the bathtub. The best that can be said for the Reid plan is, depending on the contours, it may not totally drown government, just waterboard it. And remember, it’s bound to get worse – we still have TWO budgets that Congress has to write before the next election. Fiscal Year 2012 starts at the end of September.

Plus, it could get worse still – word is that Boehner and Obama are still holding indirect back-channel negotiations on a grand bargain, even after Boehner walked out on Obama twice.