Obama to signal resolve on US deficits in New Year

Tue Jan 5, 2010 1:32pm EST

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By Caren Bohan and Andy Sullivan

WASHINGTON, Jan 5 (Reuters) - President Barack Obama is expected to signal resolve in the New Year to tame record-high U.S. budget deficits but many experts doubt Washington has the stomach for the tough medicine needed to fix the problem.

Pressure over government deficits is growing for Obama, whose approval ratings have fallen below 50 percent. Pollsters say anxiety over the deficit of $1.4 trillion in the fiscal year ended Sept. 30 is one factor contributing to the drop.

Republicans are trying to paint Obama as a big spender, though the White House counters that the lion's share of the deficits are a legacy of President George W. Bush's tax-cutting policies and the economic crisis that erupted under the Republican's watch.

China, the biggest U.S. foreign creditor, has been loudly warning Washington to get its fiscal house in order.

For now, financial markets are showing little sign of alarm. Investors remain willing to loan the U.S. government money at low interest rates but experts warn that if that were to change, it could happen suddenly.

One idea gaining traction on Capitol Hill is a "fiscal task force" to tackle the highest deficits since World War Two.

The commission, made up of both Democrats and Republicans, would have special powers to recommend spending cuts and tax increases that would then get voted on in Congress.

The White House is also mulling a task force of its own, but it would have less power than the version being pushed by Democratic Senator Kent Conrad and Republican Senator Judd Gregg, both fiscal hawks.

WHITE HOUSE TALKING TO SENATORS

The White House would not say whether it backs Conrad and Gregg's proposal, but a spokesman for Obama's budget office said the administration was talking to them about the idea.

"We share these senators' concern with the fiscal situation of the nation," said White House Office of Management and Budget press secretary Kenneth Baer.

"And as we move forward with the (fiscal year) 2011 budget process, we are talking with them and leaders on Capitol Hill about how we can best put the country on firm fiscal footing."

Obama focused his 2009 domestic agenda around a quickly enacted $787 billion economic stimulus plan and a still-unfinished effort to overhaul the healthcare system.

Although his top near-term aim is to bring down the U.S. unemployment rate of 10 percent, aides have said deficit reduction will be a key theme of Obama's State of the Union address planned for late January or early February.

He will give specifics in his proposed 2011 budget to be unveiled next month.

Analysts say it may be in Obama's interests to back a commission -- if for no other reason than to push the job of proposing politically painful remedies onto the panel rather than offering specifics himself.

Some said the idea holds promise but many were cautious.

"In one respect, the moon, the stars and the planets are all aligning properly for some sort of deficit reduction effort," said Stan Collender, a long-time budget watcher at Qorvis Communications.

"So under those circumstances, a commission might have a certain amount of momentum that it wouldn't otherwise have."

AGREEMENT DIFFICULT

Still, Collender noted, any bipartisan agreement on deficit reduction faces huge obstacles in 2010, a congressional election year in which majority Democrats are seeking to fend off a challenge to their dominance from Republicans.

Even with a commission, any bipartisan deal would require spending cuts, which many Democrats would be reluctant to embrace, and tax increases, which Republicans oppose.

"I don't see that consensus right now," said James Horney of the Center on Budget and Policy Priorities, a liberal think tank.

"It seems clear that the Republican leadership in Congress and other Republicans around the country at this point would absolutely be unwilling to discuss revenues as part of a deficit reduction package," he said.

The Senate is expected to vote on the debt commission on Jan. 20, as an amendment to a measure to raise the national debt limit. Boosting the chances of its passage, Senate leaders from both parties reached agreement on the measure before they left for their holiday break late last month.

But key House Democrats, including Speaker Nancy Pelosi, are cool to the idea as they worry it will undercut their authority.

Conrad, chairman of the Senate Budget Committee, is talking with House leaders and the White House and a compromise could emerge.

While visiting China in November, Obama gave his starkest warning yet on the budget, telling Fox News the United States risked a double-dip recession if the debt piled up too high.

"The numbers do scare people. Financial markets and international lenders in particular, are not amused," said Douglas Holtz-Eakin, a former director of the Congressional Budget Office.

Holtz-Eakin, who advised Republican Senator John McCain in the 2008 presidential election, was disappointed that the budget deficits were not a bigger political issue then. He sees some signs that is changing but noted that in 2010 there is a "crowded field" of issues on voters minds. (Editing by Simon Denyer and Mohammad Zargham)

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