Obama eyes domestic spending freeze

WASHINGTON — The Obama administration has alerted domestic agencies to plan for a freeze or even a 5 percent cut in their budgets, part of an election-year push to rein in record deficits that threaten the economy and Democrats' political prospects next fall.

The deficit-cutting drive 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 and raise interest rates. 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 budget, which will be unveiled in February, right after Obama's State on the Union address in which the initiative is sure to be a major focus.

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.