Deficit talks look at spending-cut compromises

Vice President Joe Biden smiles as he arrives to meet with a bipartisan group of lawmakers to work on a legislative framework for comprehensive deficit reduction at the Blair House in Washington, May 10, 2011.

WASHINGTON (Reuters) - Deficit-reduction negotiators have identified broad areas for saving hundreds of billions of dollars but still disagree on changing the costly but popular Medicare program, a source familiar with the talks said on Wednesday.

Vice President Joe Biden and a bipartisan group of lawmakers have "some commonality" on the government programs that can be mined for cost-savings but still have to sketch in the details in negotiations that could stretch through July, said the aide, who asked not to be identified.

"A couple hundred billion dollars" in savings are being discussed for programs whose benefit levels are not set each year by Congress, the aide said.

The aide declined to say what programs would come under the knife, but both sides have backed cuts to farm subsidies, student loans and reforms to pension insurance.

Spending cuts totaling in "the high hundreds of billions, if not into the trillions," the aide added, could be achieved in programs that Congress decides funding levels for each year. Annual caps on these programs "certainly has been discussed" along with other ideas, the aide said.

These "discretionary" programs range from education and law enforcement to defense, transportation and worker assistance.

The Biden-led group, which includes two Republican congressional leaders and four high-profile Democrats, is scheduled to meet again on Thursday.

Besides figuring out how to cut chronic U.S. budget deficits in the range of $1.5 trillion annually, they hope to clear the way for a vote in Congress to increase the government's exhausted debt limit, which is now capped at $14.3 trillion.

Biden emerged from a nearly three-hour work session on Tuesday declaring he was optimistic of an eventual deal of "well above $1 trillion" in savings over a decade, as well as mechanisms for eventually saving $4 trillion.

The Medicare healthcare program for the elderly remains a sticking point, however, according to the aide, who said that Democrats have shown "a willingness" to discuss cuts but only if tax increases also are part of a deal.

The aide added, however, that House Majority Leader Eric Cantor and Senate Minority Whip Jon Kyl both rejected any discussion of tax increases.

"A tax increase can't pass the House," the aide said.

Rising healthcare costs and the aging U.S. population will put continuing financial strains on the Medicare program.

House Republicans have embraced a budget that would make deep cuts in healthcare benefits to future retirees and would vastly change the way Medicare is run.

Public opinion polls have shown opposition to the plan that Democrats have been bashing.

(Editing by Cynthia Osterman)