Washington's Struggle to Cut Spending ; to Trim $40 Billion from the Federal Budget, Senators Hiked Student Loan Rates and Medicaid Premiums

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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. …