Obama budget to cut deficit by $1.1 t

(Reuters) - President Barack Obama proposed a budget on Monday that would cut the U.S. deficit by $1.1 trillion over 10 years, setting the stage for a bitter fight with Republicans who vow even tougher spending controls.

Conservatives say Obama, a Democrat, is a tax-and-spend liberal, and they aim to make the 2012 presidential election a referendum on his fiscal track record.

Details of the budget proposal provided by the White House before its official release showed the deficit rising to $1.645 trillion in fiscal 2011, then falling sharply to $1.101 trillion in 2012.

This trend would trim the deficit as a share of the U.S. economy to 3.2 percent by 2015 from 10.9 percent this year.

"It's a start, it's a move in the right direction," said Philip Poole, global head of macro investment strategy at HSBC Global Asset Management in London. "It's a lot less than the Republicans wanted to see. It's not clear that this can actually be enacted," he said.

Obama's budget for fiscal 2012, to be formally released at 10:30 a.m. EST (1530 GMT), is a proposal to Congress laying out the president's policy priorities. Months of wrangling with the Republican opposition in Congress will now follow.

"Even though we might have some differences at the outset, we're very eager to work with Republicans to cut spending, reduce our deficit," a senior Obama administration official told reporters.

The official cited a December tax pact forged between Obama and Republicans as evidence the two sides can work together, but the initial reaction from the other party was skeptical.

"The president talks like someone who recognizes that spending is out of control, but so far it hasn't been matched with action," Senate Republican leader Mitch McConnell said in a statement.

"Americans don't want a spending freeze at unsustainable levels. They want cuts, dramatic cuts. And I hope the president will work with us on achieving them soon."

Republicans have already unveiled much tougher proposals aimed at reining in rising U.S. debt, which is set to hit a legal limit in coming months. Failure by lawmakers to agree on funding government operations after a March 4 deadline expires could result in the government shutting down.

That would replay a 1995-1996 showdown between a Democratic president and a Republican-led House of Representatives that ultimately backfired on Republicans. The public sided with then-President Bill Clinton, who won re-election.

GROWTH LIFTS REVENUE

Two thirds of Obama's deficit savings come from spending cuts and expected reductions in interest payments as the deficit declines. The rest comes from higher revenue, in part as provisions in a December pact on payroll taxes and jobless aid expire, and also as stronger growth lifts tax revenue.

As a result, Obama's budget delivers on a promise to halve the deficit by the end of his current term in the White House, in January 2013, compared to when he took office in 2009.

To help reach that goal, Obama plans to freeze non-security discretionary spending for five years, lowering the deficit by $400 billion over 10 years.

That pledge, unveiled in Obama's State of the Union address last month, means cuts in more than 200 federal programs. These will save $33 billion in fiscal 2012, which starts on October 1, 2011, and means half of all federal agencies will see their budgets reduced, the White House said.

Defense spending in the budget will be cut by $78 billion over five years, as previously announced by Obama, and will be 5 percent lower in 2012 compared with the level sought in 2011, thanks in part to the withdrawal of U.S. troops from Iraq.

"We think this path is a sustainable path, that it puts us in a place where we can say that the second half of this decade, we'll stop adding to our debt," said a second senior administration official.

The budget shows the deficit steadying around 3 percent of gross domestic product from 2015 onward, slowing the rate at which the nation adds to its debt, although it will have still have climbed to 77 percent of GDP by 2021, up from 72 percent in 2011.

The budget also proposes funding an annual "fix" for the alternative minimum tax for the next three years by lowering the rate at which high-income Americans can itemize tax deductions.

The AMT was designed to ensure the very wealthy pay some tax after deductions and credits, but now requires an annual "patch" to prevent it from ensnaring millions of less wealthy American taxpayers and Obama's budget captures that cost.

The budget also seeks $62 billion in healthcare savings over the next 10 years to pay for two years' worth of reimbursements lawmakers traditionally deliver in a so-called "Doc-fix" to ensure physicians keep seeing the elderly patients served by the Medicare program.

"The budget that we are going to be sending to Congress... is a responsible plan that shows we can live within our means and invest in the future," the official said.