By Jarrett Renshaw and Andy Sullivan
WASHINGTON (Reuters) -The central pillar of any debt-ceiling agreement between President Joe Biden and House Republican Kevin McCarthy is shaping up to be "discretionary spending" - the chunk of the United States' roughly $6 trillion annual federal budget that is set annually by Congress.
Talks are fluid as Biden and McCarthy work towards a deal to raise the $31.4 trillion debt ceiling and avoid a default as soon as June 1. But cuts to Social Security and Medicare programs that eat up most of the U.S. budget are already off the table.
Instead, funds for programs from education to rail safety to law enforcement could be cut, trims that economists warn will slow U.S. economic growth.
WHAT IS THE US DISCRETIONARY BUDGET?
Congress sets funding levels for discretionary spending every year, which powers a wide swath of military and domestic programs.
In 2022, discretionary spending reached $1.7 trillion, accounting for 27% of the overall $6.27 trillion spent, according to federal figures.
Military spending typically accounts for roughly half of that total, though the amount varies from year to year.
The other half is devoted to domestic programs like law enforcement, transportation, housing and scientific research.
Discretionary spending as a share of U.S. gross domestic product peaked in the late 1970s, and cuts have served as the backbone for several landmark budget deals since the 1980s.
HOW COULD DISCRETIONARY CUTS WORK?
Biden and Democrats have offered to hold discretionary spending flat from the current 2023 fiscal year, a cut from Biden's 2024 budget, and then cap spending in future years.
House Republicans passed a plan last month that would save $3.2 trillion by capping growth at 1% annually for 10 years.
Republicans say they will not accept a deal unless it results in the government spending less money than it did in the last fiscal year, and are pushing for cuts to 2022 levels.
Both sides are also at odds over how long any spending caps should last, with Republicans now offering caps for six years, and the White House only two.
Negotiators are avoiding the main driver of U.S. debt: rising retirement and health costs, driven by an aging population.
The Social Security pension program is projected to increase by 67% by 2032, and the Medicare health program for seniors will nearly double in cost during that period, according to the nonpartisan Congressional Budget Office. Together, these programs account for roughly 37% of current federal spending.
MORE BATTLES AHEAD
If they can hammer out a general agreement on these levels and caps, if could help the United States avoid default, but would likely set up another series of budget battles, as lawmakers would still have to agree on funding levels for everything from fighter-plane construction to border enforcement.
Republicans have said they do not want to cut spending on national defense and veterans' care, which would require other programs to shoulder steeper cuts.
The Republican-led House Appropriations Committee has unveiled legislation that would boost spending on veterans' care, border security, and other priorities next year.
That would likely require cuts of more than 13% in other areas like scientific research and environmental protection if they want to keep overall spending at the same level as this year, according to the Center on Budget and Policy Priorities, a left-leaning think tank.
The Democratic-controlled Senate is not likely to accept those figures - which could lead to a government shutdown if the two sides do not reach agreement by Sept. 30, the end of the fiscal year.
POLITICS OF CUTS
While Republicans on the federal level have generally pushed for funding cuts to these discretionary items and Democrats to increase them, Republican-leaning states tend to benefit more from federal domestic spending, according to a Reuters analysis.
"Spending restraint always sounds good in the abstract and sounds less good when you're talking about specifics," said Jan Moller, head of the Louisiana Budget Project, a nonpartisan think tank.
Even if Biden and McCarthy agree to spending caps in the years ahead, Congress might not stick to the agreement.
In 2011, Democratic President Barack Obama reached a deal with Republicans to save $1.8 trillion over 10 years through discretionary spending caps. But lawmakers opted to bypass those caps in the years that followed.
In the end, the agreement only saved $1.3 trillion, according to Brian Riedl, a fellow with the conservative Manhattan Institute.