* Obama still hopeful of avoiding forced spending cuts
* Conservative Republican dangles revenue increases
WASHINGTON, July 31 (Reuters) - The White House said on
Tuesday it was starting to get ready for potentially painful
year-end spending cuts, and was committed to shielding U.S.
military pay from any government budget crunch.
Jeffrey Zients, acting director of President Barack Obama's
Office of Management and Budget, said discussions would start
soon on how to weather the looming automatic spending cuts,
known as "sequestration," that would take place starting Jan. 2
if Congress cannot achieve a deficit reduction deal.
The announcement came shortly after progress was made in
Congress on an important fiscal issue that is separate from the
upcoming automatic spending cuts. Republicans and Democrats
reached a tentative deal to maintain funding for government
programs through March 201 3. Wi thout such a deal, money would
run out Oct. 1, when the new fiscal year begins. [ID: nL2E8IVCYQ]
If passed by the full Senate and House of Representatives,
the deal would end any threat of government shutdowns before the
November presidential and congressional elections.
But how to deal with the scheduled round of automatic
spending cuts was proving to be more problematic.
"If allowed to occur, the sequestration would be highly
destructive to national security and domestic priorities, as
well as to core government functions," Zients said in a memo to
the heads of government departments and agencies.
Unless Congress and Obama can reach a deal by Jan. 2 on a
new formula for deficit reduction, $109 billion in spending cuts
will fall into place as a first down payment on more than $1
trillion in spending cuts over a decade. Those are to be divided
equally between defense and domestic programs.
The automatic spending cuts are the result of a
deficit-reduction deal struck last August by Obama and Congress
that also raised Treasury Department borrowing authority to
avoid an historic government credit default.
An attempt in Congress to replace the automatic spending
cuts with a series of more targeted, well- t hought- o ut reductions
and revenue increases collapsed in N ovember. But lawmakers are
hopeful they can revisit the matter.
"The president remains confident that Congress will act, but
because it has not yet made progress towards enacting sufficient
deficit reduction, the Office of Management and Budget will work
with agencies, as necessary, on issues raised by a sequestration
of this magnitude," Zients said.
A leading conservative Republican lawmaker, Senator Lindsey
Graham, on Tuesday said he was willing to consider revenue
increases as part of a broader effort to avoid the scheduled
spending cuts.
Graham said he would "close loopholes and eliminate
deductions and generate money from the tax code to offset the
effects of sequestration," along with some new savings in
military and other programs.
The administration's decision to exempt military personnel
accounts from the automatic cuts was widely expected, and had
been recommended by Defense Secretary Leon Panetta and other top
officials, despite its potential squeeze on other parts of the
Pentagon budget.
"This step was taken because the administration believes it
is in the national interest to safeguard the resources necessary
to safeguard the men and women serving to defend our nation and
to maintain the force levels required for national security," an
administration official said.
Congress has been seeking ways to avoid the automatic
spending cuts, but so far Republicans and Obama's fellow
Democrats have failed to come up with a formula.
Those decisions might not come until after the Nov. 6
elections, when lawmakers are expected to convene an end-of-year
"lame duck" work session.
In addition to the looming spending cuts, Congress will also
have to grapple with whether to extend income tax cuts, first
enacted under former President George W. Bush, which are set to
expire on Dec. 31.
The shape of these "fiscal cliff" negotiations is expected
to be influenced heavily by which political party comes out on
top in the November vote. Obama and his Republican presidential
rival, Mitt Romney, have been neck-and-neck in the polls.
