Obama says must curb U.S. debt, vows action

WASHINGTON (Reuters) - President Barack Obama, acknowledging failure to act could scare investors worried by a record U.S. deficit, said on Wednesday he would create a panel to fix the country's finances, but only offered modest budget savings of his own.

Foreign investors could sell the dollar, or demand a higher return for lending money to the United States, if they lose confidence in the country's commitment to curbing its deficit and debt. They were listening carefully to Obama's remarks for tough language on the financial outlook, and he made clear that his administration understood what was at stake.

"If we do not take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery," Obama said in his annual State of the Union address to the U.S. Congress and American people.

Laying the blame for the financial mess at the feet of his predecessor, former President George W. Bush, Obama said he would create a fiscal commission via an executive order, and urged the U.S. Senate to pass a pay-as-you-go law to ensure any spending was matched by cuts elsewhere in the budget.

"This can't be one of those Washington gimmicks that lets us pretend we solved a problem. The commission will have to provide a specific set of solutions by a certain deadline," he said, after chiding senators for blocking a similar proposal.

However, many Republicans will be wary of participating in the commission for fear it would provide Democrats political cover for raising taxes. And lawmakers in both parties who are worried about the deficit would prefer a congressional commission because a panel created by presidential executive order would have no power to force action in Congress, which controls the public purse strings.

RECORD DEFICIT IN 2009

The United States had a record deficit of $1.4 trillion in 2009, or almost 10 percent of gross domestic product, and the nonpartisan Congressional Budget Office forecasts that this will edge down to a still-lofty $1.35 trillion in 2010.

Proposing a three-year freeze on some domestic spending programs to save $20 billion in fiscal 2011, Obama also said he would end tax cuts for oil companies, investment fund managers and wealthier Americans making more than $250,000 a year.

"We just can't afford it," Obama said. He warned he would enforce budget cuts with his veto power in necessary.

However, he did honor a commitment to extend tax cuts on families that make less than $250,000.

Investors said they liked what they heard, as far as it went, but stressed that the country's fiscal hole was so large that it was going to take more than rhetoric to fix.

"I applaud the president for finally trying to tighten the government's belt and reduce spending," said Matt Mccormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati, Ohio.

"However, his attempt at deficit reduction will not materially impact the deficit and he should not expect many 'attaboys' from investors," he said.

Obama, who delivers his budget for fiscal 2011 on Monday, said his spending freeze would exclude national security and Social Security, as well as Medicare and Medicaid, which provide public health coverage for older Americans.

"Families across the country are tightening their belts and making tough decisions. The federal government should do the same," he said.

(Reporting by Alister Bull; Editing by Stacey Joyce)