Bush, Democrats brace for rancorous budget debate

WASHINGTON, Jan 24 (Reuters) Leading Democrats agree with President George W. Bush's State of the Union call for a balanced budget but a big battle looms as the two sides differ sharply over how to get there.

In his address last night, Bush set a goal of erasing the deficit by 2012 through spending restraint and without rolling back any of his signature tax cuts.

In calling for fiscal discipline, Bush was aligning himself -- at least rhetorically -- with many Democrats who have hammered him for years for racking up big budget deficits following the surpluses of the Clinton years.

The budget deficit was 248 billion dollar in fiscal 2006, down from a record of 3 billion in 2004.

But the unveiling of Bush's fiscal 2008 budget will kick off months of wrangling over spending priorities and some analysts are bracing for the most rancorous debate since a 1996 standoff that led to a temporary shutdown of the government.

''I would expect there to be vetoes and a very difficult budget process,'' said Brian Riedl at the Heritage Foundation.

Throughout the election campaign that swept them to power in both chambers of Congress, key House and Senate Democrats championed a vow to balance the budget, among them Rep. John Spratt, chairman of the House Budget Committee.

The South Carolina Democrat said after Bush's speech that he was heartened by the five-year goal of wiping out the deficit but noted the target would come three years after Bush leaves office. Even then, Spratt said, the job won't be easy with the tab for the Iraq war exceeding 100 billion dollar a year.

House Democrats campaigned last year on a promise to return the government to ''pay as you go'' budgeting, which requires that spending increases or new tax cuts be paid for and not add to deficits. The provision was passed by the House this month as part of the Democrats' first ''100-hour agenda.'' BIG SPENDER While there will be a push among some Democrats for new spending on long-sought priorities like universal health care, Riedl said the party won't want to surrender its credibility on fiscal issues and that will keep spending in check.

Bush, viewed by many Republicans as a big spender, also has strong incentives to hold to his pledge of fiscal discipline.

Conservative Republicans have vented anger at Bush for tolerating an explosion of ''earmarks'' or targeted spending projects that lawmakers attach to bigger spending bills.

Conservatives have faulted Bush for declining to use his veto pen to enforce spending discipline. He has only vetoed one bill -- on embryonic stem cell research.

But that is probably about to change.

''The president is itching to use his veto pen,'' said Cesar Conda, a former policy aide to Vice President Dick Cheney.

The sparring this year between the White House and Congress will focus on spending, even though some Democrats would like to see some of Bush's tax cuts for the wealthiest Americans rolled back. Most of the tax cuts expire at the end of 2010, giving Democrats time to wait before taking on that battle.

The Congressional Budget Office predicted on Wednesday that the budget deficit would fall sharply this year to 2 billion and the government could go into surplus by 2012. The deficits have fallen lately because of a surge in tax revenues fueled by solid economic growth.

But the CBO forecast does not factor in revenue losses if Bush's tax cuts are extended beyond 2010. Nor does it include other tax changes Congress is likely to enact to shield the middle-class from the alternative minimum tax.

Many analysts said the fiscal picture could well improve in the near term as it often does when Congress and the presidency are held by two different parties. The bigger worry continues to center on the long-term fiscal picture as the baby boom generation gets set to retire, putting a strain on entitlement programs like Social Security and Medicare.

REUTERS PDS RN0057