Let the hand-wringing commence! While there is still the possibility that the Democratic leadership may balk at this, which would provide a useful lesson to the new majority, I suspect they will cry all the way to the bank. I will explain why under the fold.
This deal all but assures that the Fiscal Commission will be given new life or their recommendations will go forward as Administration proposals, given that allowing the cuts to expire would have eliminated the need for any other deficit reduction. The renewed commission will likely have more Republicans on it, but will use the latest report as a starting point and will draft the needed legislative language, which will likely be attached to the debt limit extension.
The fact that a majority of the Commission, including Senator Durbin, supported the cut provides enough consensus to go ahead with many of these proposals (some of which are OMB favorites which would have made it into the budget anyway) - which then allowed the fiscal room to do the tax cut deal.
If you take both of these actions together, there is no need to extend the tax cuts again after 2012, as I believe the next two years will see an attempt at comprehensive tax reform which takes further talk of the Bush tax brackets off of the table.
As to Democratic dissatisfaction with this deal - IT SERVES THEM RIGHT! This matter could have been settled by Pelosi and Reid doing their jobs and getting a budget resolution passed with reconciliation instructions to do the tax cuts for the middle class with under 60 votes. They have only themselves to blame - assuming that they did not want to reward their donors with a tax cut as much as the Republicans did. This could have all been choreographed to do tax reform, which is sorely needed but rarely supported without external pressure.
Health care cuts will likely be debated but abandonned in the next Congress, as the only real answer to the fact that Medicare needs money in the future is more revenue rather than provider cuts. Additionally, the recent action where health care subsidies for the poor were used as a cash cow for a new DocFix is not sustainable. In the end, we need a public option which cannot be raided with a dedicated funding source. There is no support for a payroll tax increase (which would be appropriate) so instead I predict that the tax to fund Medicare, Medicaid and Health Care subsidies or a public option will be an expanded levy on all business value added. The only question will be whether it is a VAT, with the amount showing on the receipt, or an expanded business income tax which would allow deductions for employer sponsored health care for employees (and even for retirees).