Q+A: Possible steps to tackle the budget crunch

WASHINGTON (Reuters) - President Barack Obama, in his State of the Union speech on Wednesday, is expected to signal resolve to tame U.S. budget deficits which hover at levels not seen since World War Two.

Among his ideas will be one rejected by the Senate on Tuesday: a bipartisan commission to consider unpopular measures like tax hikes or spending cuts to get deficits under control.

Meanwhile, conservative Democrats in the House of Representatives have said they will push a variety of other measures that could return budgets to a sustainable level.

Experts say the time is ripe for such efforts, before investors lose confidence in U.S. debt and force up interest rates. But many wonder whether Washington has the stomach for the remedies needed, or the willingness to work across party lines in a highly charged election year.

WHAT IS THE PROBLEM?

U.S. debt has more than doubled over the past decade to $12.27 trillion, thanks to a combination of tax cuts, wars in Iraq and Afghanistan, elevated domestic security spending and the deepest recession since the Great Depression of the 1930s.

The government posted a record $1.4 trillion deficit for the fiscal year ended September 30, 2009, and the nonpartisan Congressional Budget Office projects a deficit of $1.35 trillion for the current fiscal year. Deficits are projected to remain stubbornly high over the coming decade as costs for retirement and healthcare programs rise.

This could spur investors including China, the biggest U.S. foreign creditor, to demand higher rates for Treasury bonds. That would push the government's borrowing costs dramatically higher and crowd out spending in other areas.

"America has probably the worst economic future it's ever had," said former Republican Senator Pete Domenici. "We could end up a second-rate world power without doing anything. It would just happen."

WHY A COMMISSION?

Commissions are a time-honored Washington method of outsourcing difficult decisions. Using them, Congress closed outdated military bases over the past two decades and shored up Social Security in the early 1980s.

But far more commissions end in obscurity, their findings ignored by lawmakers.

A commission could help get the budget under control because Congress has not shown the will do it without outside pressure, backers say. Obama is expected to call for a commission in his State of the Union speech.

WHAT ARE THE OPTIONS?

Congress is not going to set up a commission of its own after opposition from interest groups on the left and the right prompted the Senate to reject it on Tuesday.

There are two other proposals taking shape:

* WHITE HOUSE. Obama could set up a task force by executive order. It would consist of 18 members: six Republican lawmakers, six Democratic lawmakers, and the remaining six appointed by the administration.

Democratic congressional leaders have pledged that they would ensure that its findings would get a vote, probably after the November congressional elections when lawmakers are presumably feeling less political pressure.

But many Republicans have said they would not participate, viewing it as a vehicle for Democrats to impose tax increases.

* OUTSIDE EXPERTS. A blue-chip panel of retired politicians like Domenici and other budget experts on January 25 said they would examine the issue over the course of the year and come up with a set of recommendations after November elections.

Congress would be free to ignore this group's recommendations, but presumably they would carry some weight and provide a resource for lawmakers and staffers looking for solutions.

OTHER OPTIONS:

The House of Representatives has twice passed legislation that would require most new spending or tax cuts be offset by cuts elsewhere in the budget, which would at least keep the deficit from growing. Backers like House Majority Leader Steny Hoyer said a similar approach helped the government turn its deficits into surpluses in the 1990s, but skeptics in the Senate see too many loopholes in the current version.

The Senate is expected to vote this week on a modified version of so-called "paygo" legislation -- short for 'pay as you go' -- that would phase out those loopholes. The estate tax and alternative minimum tax would not currently be subject to paygo restrictions, but those exemptions would phase out after two years and an exemption for elevated Medicare spending would be phased out five years.

Separately, a group of 50 fiscally conservative "Blue Dog" Democrats said they would push a 15-point agenda to get deficits under control, from spending caps to a balanced-budget amendment. With an election looming, their measures could attract support from other lawmakers seeking to show voters they are responsible stewards of their tax money.

(Editing by Cynthia Osterman)