Obama proposes freeze in federal worker pay

President Obama listens to remarks prior to making remarks at Chrysler Indiana Transmission Plant in Kokomo, Indiana, November 23, 2010.

WASHINGTON (Reuters) - President Barack Obama proposed a two-year freeze on Monday on the pay of federal workers and vowed to work with Republicans to cut the ballooning U.S. budget deficit.

The pay freeze is part of an effort by Obama to push back against Republicans, who have labeled the president and his Democrats big spenders while taking aim at his policies such as an $814 billion stimulus package and healthcare reform.

The White House estimates the worker pay freeze would save about $2 billion in the current 2011 fiscal year and $28 billion over five years. It would require congressional approval.

Republicans welcomed the pay freeze but it drew silence from most top Democrats.

Obama said both Republicans and Democrats faced a challenge "to get federal spending under control and bring down the deficits that have been growing for most of the last decade."

But he warned that an overly abrupt reduction in federal spending could harm the fragile economic recovery.

"There's still a lot of pain out there and we can't afford to take any steps that might derail our recovery or our efforts to put Americans back to work and to make Main Street whole again," Obama said.

"So we can't put the brakes on too quickly," he said.

Fresh from big victories in congressional elections earlier this month, Republicans have vowed to make deep cuts in domestic spending.

Republicans have tried to put Obama on the defensive about the budget deficit, which hit $1.3 trillion in the fiscal year that ended in September.

Virginia's Eric Cantor, the No. 2 Republican in the House of Representatives, said he was "encouraged" by Obama's pay-freeze proposal and said he hoped congressional Democrats would also support it.

"We are pleased that President Obama appears ready to join our efforts. As the recent election made clear, Americans are fed up with a government that spends too much, borrows too much and grows too much," Cantor said in a statement.

Republican John Boehner, who will become the next speaker of the House, said he hoped Obama would build on the idea with other cuts, such as freezing federal hiring.

Representative Steny Hoyer, the No. 2 Democrat in the House, offered a lukewarm reaction to the pay freeze. Hoyer, whose Maryland district includes many federal workers, said he would "review closely President Obama's proposal.

The head of the Union for White-Collar Federal Workers criticized the pay freeze.

"There are better ways to deal with the federal deficit than making federal employees sacrifice and their families suffer," said Gregory Junemann, president of the union, which represents 25,000 federal employees.

MEETING WITH PARTY LEADERS

Republicans in Congress have tried unsuccessfully several times this year to freeze federal pay in an effort to cut the deficit, but the move was opposed by Democrats, the current majority party in the House as well as the Senate.

Republicans, however, will assume the majority in the House in January as a result of the November 2 election. Democrats will still hold dominance in the Senate but by a decreased margin.

Senate Republicans two weeks ago agreed to a proposal that would freeze federal hiring in non-security areas, which would gradually shrink the size of the government by not filling vacancies created by retirements. The proposal is nonbinding and merely reflects sentiment among Republicans in the chamber.

Obama, who took office in January 2009, has countered that the deficit is a legacy of President George W. Bush's administration.

The election defeats for Democrats were widely seen as a rebuke to Obama, and many analysts have been expecting him to focus on a message of deficit reduction as part of a move to court independent voters.

A special commission named by Obama to come up with long-term recommendations on reducing the budget deficit is due to deliver its report on Wednesday.

As part of an effort to reach out to Republicans in the aftermath of the election, Obama will meet with leaders of both parties on Tuesday to discuss legislative issues for the remaining weeks of the current congressional session.

The top issue at the meeting will be a discussion over whether to extend the Bush-era tax cuts. Obama favors continuing the cuts only for middle-class households while Republicans want to extend them across-the-board.

(Additional reporting by Thomas Ferraro, Andy Sullivan, Alister Bull and Ross Colvin; Writing by Caren Bohan; Editing by David Storey and Paul Simao)