McCain, Obama battle on spending, taxes

By John Whitesides, Political Correspondent

OXFORD, Mississippi (Reuters) - Democrat Barack Obama and Republican John McCain battled over spending, taxes and the Iraq war in their first debate on Friday, and Obama blamed the Wall Street crisis on failed Republican economic policies supported by McCain.

In a 90-minute televised debate, the two candidates repeatedly clashed over their economic and foreign policy approaches in a series of sharp exchanges that highlighted broad gulfs in their policy views.

But both men said they were optimistic Congress would come up with a $700 billion rescue plan for U.S. financial services but agreed the huge price tag would limit their agendas as president.

McCain said he would freeze federal spending as president on most programs other than defense and veterans' care, and accused Obama of being a big-spending liberal who could not bring together Republican and Democrats.

"Senator Obama has the most liberal voting record in the Senate," McCain said. "It's hard to reach across the aisle from that far to the left."

Obama said McCain would cut taxes for the wealthy and slash corporate tax rates. He repeatedly tried to tie McCain to the policies of President George W. Bush.

"This is a final verdict on eight years of failed economic policy promoted by George Bush and supported by Senator McCain," Obama said of the economic crisis on Wall Street.

Obama, an Illinois senator, said he would not be able to do everything he wanted in his administration because of the bailout, but said McCain's proposal to freeze spending was "using a hatchet when you need a scalpel."

McCain ended days of suspense earlier on Friday when he flew to Mississippi for the debate, backing away from his promise to skip the showdown if negotiations were not completed on a rescue of the U.S. financial industry.

The Arizona senator's campaign said enough progress had been made that he could participate in the first presidential debate, which could help decide a tight race in the November 4 presidential election.

"We have finally seen Republicans and Democrats sitting down and negotiating together and coming up with a package," McCain said.

The debate was scheduled to focus on foreign policy and national security, but the turmoil on Wall Street has dominated the campaign trail for nearly two weeks and was the first topic raised.

White House talks among McCain, Obama and congressional leaders ended in disarray on Thursday with no agreement on a stalled $700 billion bailout plan proposed by the Bush administration.

'OUT OF CONTROL'

McCain, who has fought local pet spending projects in Congress, said spending restraint would be a vital part of any economic recovery. "The reason, one of the major reasons why we're in the difficulties we are in today is because spending got out of control," he said.