Projected U.S. deficits unsustainable: White House

NEW YORK (Reuters) - Projected U.S. budget deficits are too high and could force up interest rates and crowd out investments unless the country takes action, the White House budget chief said on Tuesday.

The Obama administration reported a record U.S. budget deficit for last fiscal year of $1.4 trillion, or 10 percent of gross domestic product, after it moved to rescue the economy and some of the biggest U.S. banks from the worst recession in 70 years.

Next year's fiscal shortfall is expected to be about the same size, and current projections show $9 trillion in deficits over the next 10 years, averaging about 5 percent of GDP, said Peter Orszag, director of the Office of Management and Budget.

"Deficits of this size are serious, and ultimately unsustainable," Orszag said at New York University.

He blamed the funding gap on the failure of the administration of Republican President George W. Bush to finance its tax cuts and subsidies to Medicare prescription drugs as well as the recession.

The Obama administration is weighing its options on how to put things right, Orszag said.

"The president and his economic team are busy working on a range of options as we prepare for the fiscal year 2011 budget to be released in February," Orszag said.

Obama has pledged not to raise taxes on American families who make less than $250,000, but critics say they cannot see how some form of tax hike can be avoided.

Orszag did not provide details, beyond noting several steps to cut costs that have already been taken, but he reiterated Obama's pledge to cut the deficit "we inherited" in half by January 2013.

Failure to act could push up U.S. interest rates, deter investments and force the country to rely on foreign lenders to finance its spending needs, Orszag said.

He also cautioned that the current situation of low rates, despite the record deficit, was "a product of the extraordinary economic environment in which we currently find ourselves" that would likely not last as the economic recovery gathered steam.

"It is at this point that we are likely to observe a rise in interest rates, an increase in borrowing from abroad, or some combination thereof due to the deficits," Orszag said.

In answering questions from the audience after delivering his speech, Orszag cited the Great Depression as an important lesson in not withdrawing stimulus too quickly from a still-vulnerable economy that is still recovering.

"In the Great Depression," he said, "a key policy mistake that was made was taking off fiscal stimulus too quickly."

The International Monetary Fund on Tuesday projected higher debt levels for the world's major economies, but emphasized it was too soon to begin scaling back fiscal support for their economies.

(Reporting by John Parry; additional reporting by Lesley Wroughton; writing by Alister Bull; editing by Andrew Hay and Jeffrey Benkoe)