Washington's struggle to cut spending

To trim $40 billion from the federal budget, senators hiked student loan rates and Medicaid premiums.

If nothing else, Washington's tortured, year-long budget debate shows that cutting federal spending may be even more difficult today than it used to be.

Not that it's ever been easy. For at least the last quarter-century, the federal deficit has been a perennial problem of US politics. As defense and entitlement spending has grown, most everything else that the US government does has been squeezed and squeezed again in search of savings.

Many of the obvious cuts have now been made, while major reductions in domestic entitlements have proved politically elusive. The result: a deficit reduction bill that's far smaller than fiscal conservatives wanted, whose cuts may be offset by the loss of federal revenue expected from furthering the Bush tax cuts.

"It's a shadow of its former self, and it wasn't much to begin with," says Stan Collender, a budget expert and manager of the Washington office of Financial Dynamics.

The spending-cut bill passed by the Senate last Wednesday would save $39.7 billion during the next five years. Total federal outlays over the same period would top $13 trillion, according to Office of Management and Budget estimates.

Democrats forced small changes in the bill, meaning it faces another vote - and probable passage - in the House before it can be sent to President Bush and signed into law.

Republican leaders hailed the measure, calling it a small step toward controlling federal spending. They added that it marked the first successful attempt to reduce spending on Medicare, Medicaid, and similar entitlement programs in eight years. It "will help keep us on track to cut the deficit in half by 2009," said Mr. Bush.

Critics said those very entitlement cuts hurt the most vulnerable Americans. The bill "rips and tears" at Medicare and Medicaid, said Senate minority leader Harry Reid (D) of Nevada.

The final reduction bill passed by the Senate dropped some provisions that would have saved money at the expense of the pharmaceutical and managed-care industries, say critics.

"Cuts to low-income programs could have been averted in large part or entirely - and the same amount of savings still achieved - if [lawmakers] had done more to tackle certain special interests," concludes an analysis by the Center on Budget and Policy Priorities.

As it stands, the biggest savings in the bill, at $12.7 billion over five years, would come from the student loan programs. Among other changes, the legislation would fix interest rates on student loans at 6.8 percent, even if commercial rates are lower. Student loan rates now stand at 5.3 percent.

Net five-year savings from the Medicare program are estimated at $6.4 billion and Medicaid cuts are projected at $4.8 billion. Out-of-pocket costs for the poor people who rely on this federal-state health program would go up, via increased copayments and premiums. The measure would also allow states to scale back some Medicaid benefits, while tightening eligibility for Medicaid nursing home reimbursement.

Overall, the bill may show the limits of fiscal conservatives' power.

After Congress pledged some $60 billion in hurricane Katrina-related spending last fall, the Republican Study Committee (RSC), a group of conservative House members, pressed for the increase to be offset with budget cuts.

For a few months, it appeared the RSC and other budget hawk groups might succeed. But in the end, pushed by GOP moderates, the Republican Congressional leadership produced a reduction bill no larger than the one planned before Katrina hit.

And even that passed the Senate by the thinnest of margins, with Vice President Dick Cheney providing the tie-breaking difference in last week's 51-50 vote.

The pending tax cut package - which would extend some expiring provisions from past Bush reduction packages, while adding a few more tax incentives - could easily overwhelm the just-passed budget savings, complain many Democrats.

Yet the reality is that Bush and his congressional tax cut allies have found their legislative reception a bit chillier than anticipated. The Senate spent a considerable amount of time this month on tax issues, yet failed to pass legislation. Further consideration of tax cuts is sure to be a priority of Senate majority leader Sen. Bill Frist (R) of Tennessee when lawmakers return next year.

Thus the overall fiscal policy debate on Capitol Hill may now be something of a themeless pudding, to paraphrase Winston Churchill. Is it about spending reduction, tax cuts, general deficit fighting, or all or none of the above?

"There is no consensus at all about what the budget debate is supposed to accomplish," says Mr. Collender.

Meanwhile, the pending retirement of baby boomers threatens to strain the US fiscal system. Absent reform, costs of the big three entitlement programs - Medicare, Medicaid, and Social Security - are set to soar.

By 2050, the state of Uncle Sam's finances might be such that balancing the budget via tax increases alone would require a federal tax burden 57 percent greater than it is today, or about $11,000 more per household, according to an analysis by the Heritage Foundation.