UPDATE 2-Obama seeks fiscal responsibility mantle

(Adds Hoyer to introduce legislation soon)

By Caren Bohan

WASHINGTON, June 9 (Reuters) - President Barack Obama sought on Tuesday to show he was serious about improving the U.S. budget picture as he called on Congress to pass new limits on tax cuts and spending programs to avoid adding to deficits.

Obama urged passage of "pay-as-you-go" legislation that would require any new tax cut or automatic spending program to be paid for within the budget.

"The 'pay as you go' principle is very simple. Congress can only spend a dollar if it saves a dollar elsewhere," Obama said in a speech at the White House attended by several Democratic members of Congress.

"Entitlement increases and tax cuts need to be paid for. They are not free," said Obama, who has been criticized by Republicans for proposing a hefty domestic agenda that includes overhauling the health care system, bolstering education and tackling global climate change.

The White House has forecast a budget deficit for this year of $1.84 trillion, or 12.9 percent of gross domestic product.

Republicans have warned that programs such as the proposed health care plan would add to the budget deficit for years to come and have also criticized Obama's $787 billion stimulus plan, which was passed by Congress in February.

Obama contends that much of the budget deficit was inherited from the Bush administration, which presided over a shift from record surpluses to huge increases in the deficit fueled by the financial crisis and spending for the Iraq war.

"The reckless fiscal policies of the past have left us in a very deep hole," Obama said. "Digging our way out will take time and patience and tough choices."

TOP DOMESTIC PRIORITY

Obama, who has made the push to revamp healthcare a top domestic priority, has sought to allay the concerns of some Democrats about its impact on the deficit.

Surging deficits have also become an increasing concern for financial markets. Federal Reserve Chairman Ben Bernanke last week issued a warning about risks to the economy of large deficits, which drive up long-term interest rates.

Statutory pay-as-you-go has received support from House Democratic leaders like Speaker Nancy Pelosi, but Obama's proposal was met with quick resistance from a Senate Democrat who could make moving forward difficult since one senator can slow or block legislation.

Pay-as-you-go has its limits, said Senator Kent Conrad, chairman of the Senate Budget Committee. "It can prevent the passage of new legislation that would worsen the deficit, but it does not address the deficits and debt projected under existing policy," he said.

Rep. Steny Hoyer, the No. 2 Democrat in the House, said he would introduce legislation on "pay-as-you-go" on Obama's behalf in the coming days. Hoyer said he agreed with Conrad that the legislation "is only a first step toward restoring fiscal discipline."