WASHINGTON - President Barack Obama named a bipartisan panel on Thursday to tackle exploding U.S. budget deficits and promised it broad leeway to put the country on a path to fiscal responsibility.

Everything's on the table. That's how this thing's going to work, Obama told reporters after tapping former White House chief of staff Erskine Bowles, a Democrat, and former Senator Alan Simpson, a Republican, to lead the 18-member commission.

Obama's comment suggested that the panel would have latitude to consider any proposals to cut government spending -- which he warned had become extravagant -- and raise taxes.

The president promised during his campaign that families making less than $250,000 would not face tax increases but recently said he was agnostic about whether the panel could consider middle-class tax hikes.

Facing political pressure and investor anxiety over mounting government debt, Obama assigned the commission to come up with a strategy to balance the budget, excluding interest payments, in five years.

I'm asking them to produce clear recommendations on how to cover the cost of all federal programs by 2015 and to meaningfully improve our long-term fiscal picture, he said. I have every confidence that they'll do that.

To achieve the goal, Obama paired Simpson, a tall, rangy former legislator, with the bespectacled Bowles, who has a patrician bearing as a North Carolina banker.

The administration estimates the panel's recommendations could bring annual budget deficits down to 3 percent of gross domestic product. The White House forecast a $1.6 trillion budget deficit this year, or about 10.6 percent of GDP.

Economists say 3 percent annual deficits could keep the debt from soaring further, but some fiscal hawks lament that Obama is not setting a more aggressive goal.
The panel's recommendations must be reported to Congress by Dec. 1.

Obama, a Democrat, moved to form the commission after a Senate proposal to create one failed to pass.

In the short term, we're going to be taking steps to encourage business to create jobs that will continue to be my top priority, he said before signing the order.

Still, there's no doubt that we're going to have to also address the long-term quandary of a government that routinely and extravagantly spends more than it takes in.

REPUBLICANS SKEPTICAL

Republicans in Congress, who have opposed a number of Obama's initiatives, including his floundering healthcare overhaul, have been wary of a deficit-cutting commission.

They made clear they back spending cuts to trim the deficit and oppose tax hikes.

Americans know our problem is not that we tax too little but that Washington spends too much -- that should be the focus of this commission, Senate Republican leader Mitch McConnell said in a statement.
McConnell will participate by naming members to the commission, a spokeswoman said.

A spokesman for House Republican leader John Boehner said Obama had not yet responded to his proposal to support a package of spending cuts.

We still haven't heard from the president on our proposal to start cutting spending right now, he said. That doesn't mean we won't participate in this commission, but it does indicate that Washington Democrats aren't serious yet about shutting down their spending binge.

Democrats praised the choice of Bowles and Simpson, although some have been concerned about shifting focus too soon on deficit reduction while the economy remains fragile.

Their selection as co-chairs indicates that the Obama administration is serious about making this process work, said Senate Budget Committee Chairman Kent Conrad, whose similar proposal failed in the Senate last month.

The commission has been called a way to provide political cover for Obama and Congress in case they make unpopular decisions such as raising taxes to close the budget gap.

Obama acknowledged the difficulty, saying, The trajectory is clear and it is disturbing. But the politics of dealing with chronic deficits is fraught with hard choices and therefore it's treacherous to office-holders here in Washington.

The panel will have 18 members, 12 of whom will be appointed by Democratic and Republican leaders in Congress, and six by Obama. No more than four of Obama's choices will be from the same political party. Fourteen of 18 votes on the panel will be needed to report recommendations.

(Additional reporting by Steve Holland and Thomas Ferraro; editing by Cynthia Osterman)