Democrats reached a deal on their fiscal 2008 budget blueprint Wednesday that would allow them flexibility to extend tax cuts for the middle class and significantly expand domestic discretionary spending while still reaching a $41 billion surplus in fiscal 2012.

The budget plan would allow a cap of $954 billion in discretionary spending in fiscal 2008, $21 billion more than President Bush requested, providing for significant increases in veteran’s health care, education and other programs but prompting a veto threat from Bush’s budget director.

The budget will be on the House floor Thursday and could be on the Senate floor by Thursday afternoon.

“I’m confident we have the votes to pass it, if everyone is here,” said Senate Budget Chairman Kent Conrad (D-N.D.), who noted he was asking the many Senator-cum-Democratic-presidential candidates to return from the campaign trail for the vote.

The budget itself is not law and not subject to a presidential veto, but it sets the rules for the year’s spending and tax legislation. Office of Management and Budget Director Rob Portman reiterated veto threats on spending bills that exceed Bush’s request, setting the stage for a late-summer showdown with Congress on domestic spending.

To reach a deal, Democratic negotiators compromised on their “pay-as-you-go” principles to allow significant extensions of tax relief for the middle class and for estates. The budget includes “triggers” that would allow the House to use 80 percent of projected budget surpluses in fiscal 2012 for tax relief. Negotiators chose to use the White House’s rosier revenue scenario to calculate the triggers instead of Congressional Budget Office figures, and assume $180 billion in tax cuts relative to the CBO baseline, which assumes that tax cuts passed in 2001 and 2003 expire at the end of 2010 as scheduled.

Any such tax relief plan will still require 60 votes in the Senate because the budget blueprint would violate its own PAYGO rules requiring tax cuts to be offset, but that is not expected to be a problem as the Senate voted 97-1 in favor of a PAYGO-busting amendment authored by Senate Finance Chairman Max Baucus (D-Mont.).

Democrats also provided for relief from the alternative minimum tax this year, preventing up to 20 million additional taxpayers from being hit by the tax.

They also included a budget reconciliation provision that would allow a major student loan overhaul to move later this year without the threat of a Senate filibuster, provided that it can muster at least $750 million in net savings over five years.

Democrats contended that the budget can be balanced without any tax rate increases but instead by improving tax compliance and shutting down offshore tax shelters.

Conrad said that he agreed to include reconciliation language for student loan changes only after House leaders pledged to reduce the deficit by $750 million, or 10 times the original target proposed by the House.

“I do not favor reconciliation for this purpose, but increasing the amount they have to produce for deficit reduction by 10 times will … hopefully prevent others from going this route,” Conrad said.

Conrad said he agreed to a higher domestic discretionary cap than the Senate had proposed because of uncertainty over how much emergency spending will be included in the supplemental Iraq War spending bill. “We simply don’t know what’s going to happen with the supplemental, and that has a cascading effect,” he said.

Conrad also dismissed the White House’s recent threat to veto any spending bills that do not hew to the president’s proposed discretionary spending cap.

“There’s a reason why the United States had no budget last year. There’s a reason 10 of the 12 appropriations bills weren’t considered last year. The reason is the White House had numbers that were unrealistic,” Conrad said. “The vast majority of the increase in spending in our bill … is for war and national defense.”

But over five years, spending actually would decrease as a percentage of gross domestic product, Conrad explained.

Portman ripped the budget Wednesday, noting a 9 percent increase in discretionary spending relative to fiscal 2007.

“The new Democratic majorities are standing by their misguided plans for tax hikes and big spending increases,” Portman said in a statement. “Tax and spend is no way to balance the budget.”

But House Budget Chairman John Spratt (D-S.C.) contended that the Democratic plan was more fiscally responsible than Bush’s, which would fail to balance the books under the CBO’s forecast.

“It posts smaller deficits than the president’s budget over five years; adheres to the pay-as-you-go principle and contains no new mandatory spending not paid for,” Spratt said.

Democrats said the increased spending would allow for increases in education, veteran’s health care and children’s health care. Bush had proposed a near freeze on domestic programs.