Orszag: Must act on U.S. budget to avoid crisis

WASHINGTON (Reuters) - U.S. President Barack Obama's new fiscal commission is aimed at fixing the country's budget woes before they trigger a potential market crisis, the top White House budget official said on Tuesday.

Obama gave his 18-member bipartisan panel, which met for the first time on Tuesday, broad leeway to come up with ideas for taming huge budget deficits.

White House budget director Peter Orszag told Reuters Obama does not want to see the panel hemmed in by a partisan atmosphere during a congressional election year and believes it should have "the room to evaluate all options and examine things carefully."

Calling the deficit a very serious problem, Orszag said its effects on the financial markets were not evident yet because of unusual factors that have kept long-term interest rates low, but he warned that that would change.

"We have just gone through a highly unusual period in which private borrowing collapsed," Orszag said in an interview.

"As the economy picks back up, private borrowing will start to pick up again, as we're starting to see, and that will put upward pressure on interest rates, and ultimately you'll see increases in government bond rates," he said.

The Obama administration wants to avoid a situation in which credit markets "unravel" in a disorderly way as worries about the U.S. fiscal situation unsettle investors.

"I think the goal is to get ahead of an adverse financial market reaction, and that's exactly why, for example, the commission is charged with coming back by the end of this year," he said.

The deficit commission is led by Democrat and former White House chief of staff Erskine Bowles and former Republican Senator Alan Simpson.

Obama has asked the group to come up with recommendations by December 1, weeks after the November congressional elections.

The U.S. budget deficit hit $1.4 trillion in 2009, just shy of 10 percent of the overall economy. The gap could be even larger this year.

POLITICAL FODDER

Even before the commission held its inaugural meeting, there were signs that the remedies it might consider were becoming fodder for the election-year debate.

After former Federal Reserve Chairman Paul Volcker, an outside adviser to Obama, mentioned a value-added tax as one possible option to close the deficit, Republicans seized on it to suggest the president might use the panel as cover to introduce such a tax.

"When he says everything should be on the table, he's not saying what he will or won't support," Orszag said, declining to comment on his views about the European-style VAT.

The White House has secured a promise from House of Representatives Speaker Nancy Pelosi and Senate Majority Harry Reid to have Congress take up any proposals that might result from the commission's work.

"To the extent that they're sensible recommendations, and I would imagine that's what happens, we would like to then move to enacting them," Orszag said.

Orszag dismissed news reports that he had considered leaving the White House as "parlor games."

"I have no plans to leave," he said.

(additional reporting by Donna Smith; Editing by Cynthia Osterman)