Obama backs spending freeze in centrist speech

WASHINGTON (Reuters) - U.S. President Barack Obama proposed a five-year freeze on some government spending and struck a centrist tone on Tuesday in a speech designed to prove he has fiscal discipline and can work with resurgent Republicans.

Obama said in his State of the Union speech that voters want Democrats and Republicans to govern with "shared responsibility." He offered a raft of proposals that some of his opponents might find appealing as he positions himself for a 2012 re-election bid.

"We will move forward together, or not at all, for the challenges we face are bigger than party, and bigger than politics," Obama said.

Obama's goal in the speech was to reassure Americans weary of stubbornly high 9.4 percent unemployment, fearful of rising debt and worried that their country is falling behind economic powers like China and India.

He called for a job-creating "Sputnik moment" fed by new investments in research and education like the 1950s space race, saying what is at stake is "whether new jobs and industries take root in this country, or somewhere else."

"Yes, the world has changed," Obama said. "The competition for jobs is real. But this shouldn't discourage us. It should challenge us."

CHANGED ATMOSPHERE

The speech took place in a changed atmosphere on Capitol Hill. Republicans enjoy increased power in Congress after November's congressional elections and Obama was forced to take account of that shellacking by emphasizing areas where agreement might be possible.

But a civil tone was evident, with many Democrats and Republicans sitting together instead of in separate blocs. It was a show of solidarity with Democratic Representative Gabrielle Giffords, who was shot in the head in a January 8 mass shooting in Arizona that killed six.

Obama's statesmanlike response to the killings and surprise legislative successes after the bruising mid-term election have helped lift his approval ratings back above 50 percent. The State of the Union speech is seen as test of whether he can build upon this momentum and recapture the magic of his 2008 election.

Obama addressed Republican concerns about spending by going partly in their direction. He proposed a five-year freeze on domestic spending that he said would reduce the budget deficit by $400 billion (£253 billion) over a decade, but stopped short of massive cuts demanded by his opponents.

The freeze would not apply to big entitlement programs -- such as Social Security and Medicare -- at the heart of America's deficit problem.

In a nod to business, Obama also called for lowering the corporate tax rate.

Republicans said more cuts were needed. They say voters in November gave them increased power in order to roll back the size and scope of government.

"A few years ago, reducing spending was important," Wisconsin Republican Representative Paul Ryan was to say in the Republican response to Obama. "Today, it's imperative. Here's why. We face a crushing burden of debt."

Obama said to cut spending, as Republicans want, in research and education would be "like lightening an overloaded airplane by removing its engine."

"It may feel like you're flying high at first, but it won't take long before you'll feel the impact," he said.

Discretionary spending, excluding money for security, makes up just 13 percent of the $3.7 trillion U.S. budget.

Republicans, who won control of the House in November congressional elections after campaigning for less government spending, have called for $100 billion in federal cuts.

OBAMA PROPOSALS

Obama called for closing tax loopholes and using the savings to lower the corporate tax rate for the first time in 25 years. Republicans want a lower corporate tax rate but may not be willing to close tax loopholes.

He vowed to pursue trade deals with Panama and Colombia similar to a recently concluded pact with South Korea, a move likely to be welcomed by trade-friendly Republicans.

But in a proposal Republicans could be expected to fight, Obama backed an end to tax subsidies for oil companies to help pay for clean energy innovation.

He set a goal of having 80 percent of U.S. electricity production to come from clean energy sources, nuclear, solar, wind and "clean coal," by 2035.

Drawing another battle line, Obama made clear he opposed permanently extending tax cuts for wealthier Americans after agreeing to a two-year extension in a December tax-cut compromise with Republicans.

Obama, enjoying a modest rise in public opinion polls, hoped the annual address would help him start winning back disgruntled independent voters who will be central to his re-election prospects in 2012.

Americans have responded positively to better bipartisan cooperation after Obama struck a deal with Republicans over tax cuts, helping lift his approval ratings in recent weeks.

Americans are fearful of a $1.3 trillion budget deficit and rising federal debt, which could hit a statutory limit of $14.3 trillion by March 31.

With 14.5 million Americans counted as out of work, the White House wants to ensure any cuts in federal spending do not undermine the country's gradual economic recovery.

Financial markets watched for anything Obama says about raising the debt limit, a move that has been resisted by some Republicans but which investors see as essential for the country to avoid defaulting on its debt.

(Additional reporting by Alister Bull, Andy Sullivan, Caren Bohan, Matt Spetalnick, Ross Colvin and Patricia Zengerle; Editing by Doina Chiacu)