Obama budget to get serious with deficit: Lew

WASHINGTON Wed Feb 2, 2011 3:36pm EST

WASHINGTON (Reuters) - President Barack Obama's upcoming budget will lay out a credible plan to lower the U.S. deficit, but the funding gap will grow initially due to the extension of tax cuts, Obama's budget chief said on Wednesday.

"The budget will show a very serious path of deficit reduction," White House Office of Management and Budget Director Jack Lew told Reuters in an interview.

Obama, a Democrat, is under pressure from Republicans to make deep cuts in government spending. Republicans have greater strength in the Senate and control of the House of Representatives after winning big in November elections after a campaign built largely around fiscal austerity.

The president has received bipartisan recommendations for a bold overhaul of the U.S. tax code and government spending from a commission he appointed, and Lew said that items from that report will be reflected in the budget proposal.

But the president also wants investment to lift U.S. growth and steps that shield a fragile economic recovery. These include a tax package agreed with Republicans in December that will initially make the deficit numbers look worse.

Lew said that the budget proposal, scheduled for release on February 14, will show "the fiscal year '11 numbers and '12 numbers are going to ... have a bit of a bump up in terms of the deficit because of the tax legislation."

EXTENDING TAX CUTS

Extending Bush-era tax cuts for two years alongside measures to protect aid for the long-term unemployed will pump an estimated $858 billion into the economy and has encouraged private sector economists to lift forecasts for U.S. growth.

But the new budget plan, to be published shortly before a stop-gap law funding the government ends on March 4 and with federal debt likely to hit a congressionally set ceiling before the end of May, will also detail a "pivot" to deficit control.

"It is going to be a point of distinction that we have to get out of this period of needing to get the economy moving and then switching gears to reducing the deficit," Lew said.

That funding gap now represents 9.8 percent of the U.S. economy, or a towering $1.48 trillion for the current fiscal year, according to the latest estimate by the nonpartisan Congressional Budget office.

Obama announced last week he would propose a five year freeze in non-security discretionary spending in his new budget that will lower the deficit buy $400 billion over 10 years.

Lew declined to spell out what additional cuts were on the table, if any, but stressed that it was essential that spending be tailored in a manner that did not do more harm than good.

"There's not going to be a question of not putting a budget out there with tough choices and tough cuts," Lew said.

"But there will also be the question of how far do you want to go in some of these areas and what are the consequences of going beyond a certain line," he said.

(Additional reporting by Emily Kaiser, Timothy Ahmann and Kim Dixon; Editing by Cynthia Osterman)

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