Republican Boehner says spending cuts No. 1

House Republican Leader John Boehner (R-OH), who broke into tears during his speech, addresses supporters at a Republican election night results watch rally in Washington, November 2, 2010.

WASHINGTON (Reuters) - House of Representatives Republican leader John Boehner put lower government spending at the top of Congress' agenda next year, a day after his party took control of the House.

"It's pretty clear the American people want us to do something about cutting spending here in Washington and helping to create an environment where we'll get jobs back," Boehner told reporters on Wednesday.

Republicans picked up at least 60 seats in Tuesday's elections to hold a solid majority in next year's House. Boehner is expected to get the top job of House speaker, supplanting Democrat Nancy Pelosi.

With last year's U.S. budget deficit at a whopping $1.29 trillion, equal to 8.9 percent of gross domestic product, voters have been clamoring for smaller, less expensive government.

Some economists fear that politicians could pare spending too much and wind up stifling economic growth, while others have called for more stimulus spending to boost tepid economic growth that has failed to significantly reduce an unemployment rate stuck near 10 percent.

Embracing the small government theme, House Republicans have promised to rein in government. In September, they said their first step would be to cut Washington's spending back to 2008 levels, achieving $100 billion in savings immediately -- a move that would do little to sop up the red ink on the ledger.

Republicans have also been pushing for bigger tax cuts than President Barack Obama wants, which would add more to the federal debt than would Democratic tax-cut proposals.

Obama on Wednesday said there is a potential for compromise on the tax issue.

"How that negotiation works itself out I think it's too early to say," he said at a Wednesday news conference.

During remarks to reporters earlier, Boehner refused to go into detail on the spending cuts he would seek. Asked for the No. 1 spending cut on his list, the Ohio Republican would only say: "We'll make a lot of decisions over the coming months."

He later repeated his call to freeze spending at 2008 levels.

The first fight in Congress on spending priorities will be over the fiscal 2011 funding for across-the-board government activities. The debate over priorities for the fiscal year, which began on October 1, could resume as early as November 15, when the current Congress holds a post-election work session.

But if the outgoing Congress cannot reach a deal, spending priorities for the rest of the fiscal year will be fought out in January or February, after Republicans take control of the House from Democrats and a larger bloc of Republicans joins a Senate still under Democratic control.

BUSH TAX CUTS

The second major fight will be over the broad tax cuts won by Republican President George W. Bush that will expire at the end of this year if Congress does not act.

Republicans favor fully extending the lower rates for all Americans, while Obama and most Democrats back renewing them only for individual annual income up to $200,000 and family income up to $250,000.

"The single most important thing I think we need to do economically -- and this is something that has to be done during the lame-duck session -- is making sure that taxes don't go up on middle-class families next year," Obama said on Wednesday.

A potential compromise would be permanent extension of the lower rates for the so-called middle class, and a temporary extension of lower rates for wealthier Americans.

Obama said he hopes to meet with Boehner and other congressional leaders in coming weeks to work on a deal and avoid "brinkmanship."

At a news conference on Wednesday, Boehner said: "We continue to believe that extending all of the current tax rates for all Americans is the right policy for our economy at this time." He did not elaborate, when asked, whether he would consider any compromise.

On the Senate side, where Democrats still retain power, albeit with a slimmer majority, Senate Majority Leader Harry Reid said a permanent extension of all the tax cuts "won't happen."

Reid won re-election after a tough race on Tuesday, fending off a popular candidate of the anti-tax Tea Party movement.

Because taxes are levied marginally, an individual making $250,000 would only pay the highest rate on income above the $200,000 threshold.

Lower tax rates on dividends and capital gains for high earners also would expire at year's end unless Congress extends them.

"It comes down fundamentally to a question of: Are Republicans willing to cut a deal on tax issues with Democrats to get them off the table temporarily, or whether they think they can get a better deal in January and February," said Clint Stretch, tax principal at Deloitte Tax and a former congressional staffer.