Obama to seek three-year freeze on domestic spending

WASHINGTON - President Barack Obama, under pressure from deficit hawks, will seek a three-year freeze on domestic spending in his 2011 budget that would save $250 billion by 2020, administration officials said on Monday.

Obama will outline the spending hold-down in his State of the Union address on Wednesday and will spell it out in detail on February 1, when he unveils his second budget.

Obama is under fire for a record deficit and has called for a bipartisan congressional commission to consider spending cuts and tax increases to improve the country's fiscal outlook.

Democrats are jittery after the Massachusetts election of a Republican for the Senate seat long held by the late Edward Kennedy, worried that it may be a warning sign for congressional elections in November.

That election dealt a blow to Obama's top domestic priority, healthcare reform, and in his State of the Union address, the president is expected to focus on job creation and economic growth, which public opinion polls show to be at the top of the list of concerns for many Americans.

In proposing the spending freeze, Obama seeks to address some of those concerns, but some economists were skeptical that it would by itself have a major impact.

We doubt it will make any visible dent in the deficit projections -- that requires spending cuts and tax raises, not just spending freezes, said Michael Katz, an economist at Forecast in Sydney.

The news of a spending freeze, in our opinion, will have little impact on the U.S. dollar or economy in medium term.

Obama's proposed budget savings will need congressional backing and would exclude Defense, Veterans Affairs, Homeland Security and spending on international affairs, the officials said.

We are in the midst of fighting a war and have security needs. We're going to fund those security needs as necessary, one of the officials told reporters, speaking on condition of anonymity.

The officials declined to detail which agencies or programs would be hit, but said the overall freeze in so-called discretionary non-security spending would not halt investment in some areas, and would be balanced by cuts elsewhere.

Adjusted for inflation, the freeze would mean effective budget cuts in those areas of spending, the officials said.

Republicans dismissed the move as window-dressing by Obama's Democrats after an unprecedented spending binge.

This is like announcing you're going on a diet after winning a pie-eating contest, said Michael Steel, spokesman for House of Representatives Republican leader John Boehner.

However, a White House official countered that discretionary non-security spending had risen sharply during the years when Republicans had controlled Congress under Obama's predecessor, former President George W Bush.

The 2010 budget allocated $447 billion to non-security discretionary spending, or about one-eighth of the overall budget. Agencies that could feel the pinch include the Commerce, Interior, Justice and Labor departments, as well as the Environmental Protection Agency.

The United States ran a record $1.4 trillion budget deficit in fiscal year 2009.

Part of the problem, on top of a severe recession that hit government revenue, are entitlement programs like social security and Medicare, the huge public healthcare program for older Americans.

Obama wants to reduce soaring Medicare costs through an overhaul of the $2.5 trillion U.S. healthcare system, but his reforms are bogged down in Congress.

The officials said the proposed freeze would not affect entitlement programs but argued it could help set a tone of fiscal discipline.

Imposing discipline here is one part of an overall picture and ... helping to create a new atmosphere of fiscal discipline ... can actually also feed into debates over other components of the budget, one of the officials said.

The freeze would cut the deficit by between $10 billion and $15 billion in fiscal 2011. A total of $250 billion would be wrung from the budget by 2020, they said.

But, the impact would not undermine the economy's recovery after the most prolonged contraction in 70 years.

From a macro-economic perspective, I don't think there will be a huge affect in 2011, the official said.

(Reporting by Alister Bull; Editing by Anthony Boadle and Eric Walsh)