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Budget Freezes, Spending Cuts Possible Says White House

The Obama administration is alerting domestic agencies to expect their budgets will be frozen or even cut by 5 percent, part of an election-year push to rein in record deficits that threaten the economy and Democrats' political prospects next fall.

Hundred Dollar
Bill Haber
Hundred Dollar

The warning to agencies comes as President Barack Obama traveled to Asia where several nations, especially China, have expressed concerns about the size of U.S. deficits.

China is the largest foreign holder of U.S. Treasury securities and policymakers worry that alarm over deficits could push foreigners into cutting back on their purchases of Treasury debt.

White House budget director Peter Orszag said Friday that it is imperative to start curbing the flow of red ink in coming years so as not to erode the fledgling economic recovery. But he called it a balancing act and said acting too fast could undercut the recovery.

Orszag wouldn't comment on the specifics of the upcoming Obama budget, which will be unveiled in February.

Democratic officials in the White House and on Capitol Hill say options for locking in budget savings include caps on the amount of money Congress gets to distribute each year for agency operating budgets. The officials spoke on condition of anonymity to frankly discuss internal deliberations.

"As part of that fiscal 2011 budget, we will be putting forward proposals that will put us back on a fiscally sustainable path and that have lower deficits," Orszag said in a recent Associated Press interview. "I'm not going to get into the mix between spending and revenues. Obviously deficit reduction requires some combination of those two."

On Thursday, the government reported that the federal deficit hit a record for October as the new budget year began. The Treasury Department said the deficit for October totaled $176.4 billion, even higher than the $150 billion imbalance that economists expected.

The deficit for the 2009 budget year, which ended on Sept. 30, set an all-time record in dollar terms of $1.42 trillion. That was $958 billion above the 2008 deficit, the previous record holder.

The budget freeze was planned before Democratic setbacks in last week's elections. But the bad results for Democrats -- independent voters that were central to Obama's winning coalition last year voted roughly 3 to 1 for GOP gubernatorial candidates in Virginia and New Jersey -- appear to have added urgency to the deficit-cutting drive.

Office of Management and Budget Peter Orszag
CNBC.com
Office of Management and Budget Peter Orszag

Independents, pollsters say, tend to be more concerned about the deficit than other voters and getting them back in the Democratic column is crucial to the party' chances in midterm congressional elections.

The mandate to domestic agencies to limit their budget requests for the 2011 budget year comes as an economic advisory board chaired by Paul Volcker is debating ways to reform the tax code. Virtually all budget experts say there will have to be revenue increases to make any significant dent in the deficit.