Expected Republican gains in November elections will limit President Barack Obama's room to maneuver on economic policy and focus the United States on hard choices needed to confront its yawning budget deficit.width=598

With new moves to stimulate growth through spending all but ruled out, the debate on how best to tackle a rising national debt will heat up when a commission of lawmakers and budget experts appointed by Obama reports in December.

Many economists are urging caution about drastic cuts in an economy that remains fragile. But if a credible plan to tackle the deficit emerges after the November 2 elections, that in itself could boost consumer confidence and growth.

Obama this month proposed additional economic measures costing $180 billion over the next 10 years to encourage growth and hiring by fostering research, investment and ramping up spending on U.S. infrastructure.

Republicans have blocked many White House proposals because of their feared impact on the country's record $1.47 trillion deficit. This opposition could deepen if they win control of the U.S. House of Representatives from Democrats in November.

If the conventional wisdom is right and Republicans do very well, then the president will not offer up more stimulus because he knows they will oppose it, said Isabel Sawhill, a senior fellow at the Brookings Institution.


Republicans have campaigned against government spending and their message has found its mark. A Reuters/Ipsos poll released on Tuesday showed 60 percent of respondents agreed that reducing the budget deficit would create jobs.

Economists who favor more robust measures to encourage output say this opposition will deny the economy vital assistance from additional fiscal policy action, even as growth remains modest and U.S. unemployment stuck near 10 percent.

But others said the time for giving the economy a quick jolt of government stimulus had passed.

I no longer think it is appropriate to do Keynesian cyclical policy. We're not falling any more, nor do I think it would work, said Douglas Holtz-Eakin, who advised Republican Sen. John McCain during the 2008 presidential campaign.

It is time to rethink the strategy. We're growing, albeit slowly. So what are the long term levers to put in place to improve the outlook for the economy? he said.

Holtz-Eakin saw trade deregulation and steps to control public spending as good long-term bets. Neither would be politically easy. Obama been cautious on trade, which U.S. workers say cost jobs, while aggressive action to curb spending could pressure social programs cherished by his Democrats.


Obama has said tough decisions will have to be made once his fiscal commission reports.

Addressing fears of Americans that their future was being mortgaged by government spending, the president vowed last week to examine everything from defense budgets to food stamps in a bid to get the deficit under control.

Obama's commission is due to recommend ways to cut spending and increase revenue when it reports by the end of December. But with high unemployment, any calls for spending cuts are expected to focus on the long term.

The fiscal commission could provide the cover needed to put in place fundamental reforms that could address the structural budget shortfalls, said Michael Feroli, chief U.S. economist at JP Morgan in New York.

But, as Romer and others have stated, now is probably not the right time to impose fiscal stringency, he said.

Christina Romer, in her final speech as chairwoman of the White House Council of Economic Advisers, urged leaders to find the will to use fiscal policy to help the 14.9 million Americans reported as unemployed last month

But this contrasted somewhat with the advice from Obama's former budget chief Peter Orszag, who urged in a New York Times opinion piece to extend all Bush-era tax cuts for two years and then allow them to expire to help curb the deficit.

The White House wants to make tax cuts for families making less than $250,000 permanent, at a cost in terms of lost revenue estimated by the U.S. Treasury at $2.9 trillion over 10 years, but allow taxes on wealthier Americans to rise.

Extending the top tax cuts would cost $700 billion over 10 years, which Obama says the country cannot afford.

This political standoff means only modest U.S. growth and painfully slow job creation.

I do not think there is any simple way to lift the economy quickly out of its current problems, said James Hamilton, an economics professor at the University of California at San Diego.

(Reporting by Alister Bull, Editing by Anthony Boadle)