Obama seeks to tame runaway U.S. deficits

A congressional source told Reuters that the White House would project a record $1.6 trillion budget deficit in the current 2010 fiscal year that ends September 30. That's an increase from the $1.4 trillion gap posted in 2009.

The White House will issue the fresh forecasts, along with ideas for reining in shortfalls, when it unveils Obama's proposed budget for the 2011 fiscal year at 10 a.m. EST. Obama is to deliver remarks on the fiscal situation at 10:45 a.m. EST.

The figures indicate that the deficit will remain at levels not seen since World War Two, when measured as a percentage of the economy.

Criticized by Republicans as a big spender, Obama used his State of the Union address last week to hammer home a promise of fiscal discipline, telling Americans he would dig the country out of a massive fiscal hole.

In his budget, Obama will propose a three-year freeze on some domestic programs to save $20 billion next year and $250 billion by 2020.

But that will not be enough to get deficits down permanently to the 3 percent of gross domestic product that most economists consider sustainable.

Deficits are projected to fall as the economy recovers, but they will still average roughly 4.5 percent of GDP over the coming decade, according to the estimate.

The shortfalls are expected to rise again toward the end of the decade due to the increasing cost of retirement and healthcare programs as the baby boom generation retires.

The budget, which requires approval from the U.S. Congress, will include proposals for tax credits to businesses to spur hiring, targeted tax breaks for families and aid to cash-strapped states.

CHINA CALLS FOR FISCAL ORDER

Obama will call for the creation of a bipartisan commission to recommend ways to address long-term budget problems.

Obama has warned that the burgeoning U.S. debt could spook U.S. financial markets, driving up borrowing costs and putting future economic growth at risk.

China, the biggest foreign holder of U.S. Treasuries, has urged the United States to get its fiscal house in order.

Obama has made clear that his highest priority for now is bringing down the U.S. unemployment rate, which at 10 percent is near a 26-year high.

A report on Friday showing a 5.7 percent jump in U.S. GDP was an encouraging sign, highlighting that the economic recovery that began late last year is firmly on track.

But businesses remain wary of hiring and many private economists believe it could be several months before the jobless rate begins to decline.

The loss to Republicans last month of a pivotal U.S. Senate seat in Massachusetts put Obama's sweeping agenda for healthcare reform and other initiatives at risk by robbing Democrats of the super-majority needed to block procedural hurdles in the Senate.

It has also left Obama's Democratic allies worried about potential big losses in the November congressional elections.

Obama's emphasis on fiscal restraint could appeal to politically independent voters, who are anxious about the rising budget deficits and moved away from Democrats in the Massachusetts race.

Republicans have labeled Obama's $787 billion stimulus package, enacted last February, a wasteful measure that failed to deliver on its promise of creating jobs, though many private economists say it has helped to offset job losses.

Republicans have also criticized Obama's proposed health care plan, saying it would drive up deficits further.

Democrats point out that most of the fiscal mess has been inherited from the previous administration of Republican George W. Bush, who cut taxes and created an expensive prescription drug-benefit while pursuing wars in Iraq and Afghanistan.

The recession, which began in December 2007, also worsened the fiscal picture by depressing government revenues while forcing up spending on unemployment benefits and other safety-net programs.

The U.S. economy returned to growth last year after the worst downturn since the 1930s.

Obama's budget request shows broadly how he wishes to implement fiscal policy but the Democratic-led U.S. Congress will make the decisions about which proposals to accept or reject during a process that usually lasts most of the year.

(Editing by Doina Chiacu and Eric Walsh)