Obama Wants Fiscal Responsibility; Drops Salary Caps

President Barack Obama sought on Tuesday to show he was serious about improving the U.S. budget picture as he called on Congress to pass new limits on tax cuts and spending programs to avoid adding to deficits.

CNBC.com President Barack Obama

Obama urged passage of "pay-as-you-go" legislation that would require any new tax cut or automatic spending program to be paid for within the budget.

"The 'pay as you go' principle is very simple. Congress can only spend a dollar if it saves a dollar elsewhere," Obama said in a speech at the White House attended by several Democratic members of Congress.

"Entitlement increases and tax cuts need to be paid for. They are not free," said Obama, who has been criticized by Republicans for proposing a hefty domestic agenda that includes overhauling the health care system, bolstering education and tackling global climate change.

The White House has forecast a budget deficit for this year of $1.84 trillion, or 12.9 percent of gross domestic product.

Republicans have warned that programs such as the proposed health care plan would add to the budget deficit for years to come and have also criticized Obama's $787 billion stimulus plan, which was passed by Congress in February.

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Obama contends that much of the budget deficit was inherited from the Bush administration, which presided over a shift from record surpluses to huge increases in the deficit fueled by the financial crisis and spending for the Iraq war.

"The reckless fiscal policies of the past have left us in a very deep hole," Obama said. "Digging our way out will take time and patience and tough choices."
    
Top Domestic Priority

Obama, who has made the push to revamp healthcare a top domestic priority, has sought to allay the concerns of some Democrats about its impact on the deficit.

Surging deficits have also become an increasing concern for financial markets. Federal Reserve Chairman Ben Bernanke last week issued a warning about risks to the economy of large deficits, which drive up long-term interest rates.

Statutory pay-as-you-go has received support from House Democratic leaders like Speaker Nancy Pelosi, but Obama's proposal was met with quick resistance from a Senate Democrat who could make moving forward difficult since one senator can slow or block legislation.

Pay-as-you-go has its limits, said Senator Kent Conrad, chairman of the Senate Budget Committee. "It can prevent the passage of new legislation that would worsen the deficit, but it does not address the deficits and debt projected under existing policy," he said.

Rep. Steny Hoyer, the No. 2 Democrat in the House, said he would introduce legislation on "pay-as-you-go" on Obama's behalf in the coming days. Hoyer said he agreed with Conrad that the legislation "is only a first step toward restoring fiscal discipline."

Rep. Eric Cantor, a Republican, said Obama had undertaken "historic spending" during his first five months in office.

"So for us to sit here and listen to the White House say that 'We ought to be responsible, we ought to pay for what we're doing' I think lacks just a little bit of credibility," Cantor said.

Obama Drops Tough Plan On Bank Compensation

Separately, the Wall Street Journal reported that the Obama administration is dropping its plan to cap salaries at firms receiving government bailout money, leaving them subject to congressionally  imposed limits on bonuses. The move is likely to end months of confusion on Wall Street about separate pay directives from the White House and Congress.

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The administration is expected to announce the compromise on Wednesday, the Journal said. In addition to standing behind the restrictions passed by Congress in February, the administration plans to push for broad changes in compensation practices across the financial-services industry, the Journal added.

The Obama administration will unveil executive pay rules for firms receiving government aid by the end of the week and will name a pay czar with power to reject compensation plans at firms
getting "exceptional assistance," an administration official said late on Tuesday.

"In the case of a company receiving exceptional assistance, the special master would have the authority to disapprove of a company's compensation plan if he determined they were paying excessive and unjustified salaries to their top executives," the official said.

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