By Steve Holland
WASHINGTON (Reuters) - U.S. President Barack Obama on Wednesday faced a looming battle with Republicans over deficit reduction and government spending despite setting a conciliatory tone in his State of the Union speech.
With an eye on his 2012 re-election bid, Obama used his televised address to the nation on Tuesday night to further a move to the political centre that he made after Republicans routed Democrats in congressional elections in November.
But he will have a fight on his hands over his budget plan to be presented in February. Republicans are calling for steep spending cuts to close the gaping budget deficit.
Underlining the size of the tough task ahead, the Congressional Budget Office on Wednesday forecast the deficit will grow to $1.48 trillion (£931 billion) this year from an earlier estimate of $1.07 trillion.
Republicans seeking $100 billion in cuts this year to help get the United States on a sounder fiscal footing called plans by Obama for a spending freeze too little, too late.
"There's got to be some kind of absolute iron-clad path to getting (spending) down," Republican Senator John McCain said on ABC's "Good Morning America" program on Wednesday.
In a bid to show he has fiscal discipline, Obama proposed a five-year freeze in some domestic spending, which he said would cut $400 billion from budget deficits over a decade, a move applauded by U.S. debt and stock traders.
"A partial freeze is inadequate at a time when we're borrowing 41 cents of every dollar we spend, and the administration is begging for another increase in the debt limit," said House of Representatives Speaker John Boehner.
Obama's prime-time speech offered some potentially appealing proposals to his newly empowered Republican opponents -- a corporate tax cut, reform of the tax code and an end to pet spending projects coveted by many lawmakers.
World stocks rose and the dollar hit a two-month low against the euro after Obama's promise of spending cuts cemented expectations that the U.S. Federal Reserve will retain faith in its loose policy.
Republicans have threatened to obstruct Congress raising the national debt ceiling by the time it hits a statutory limit of $14.3 trillion by March 31. The country could default on its debt, causing financial havoc, if the limit is not increased.
'EXCESS WEIGHT'
To Republican calls for even deeper cuts, Obama said, "Let's make sure what we're cutting is really excess weight."
Obama sought on Tuesday night to reassure Americans weary of stubbornly high 9.4 percent unemployment, fearful of rising debt, dismayed at vicious political rhetoric and worried that their country is falling behind economic powers like China and India.
"At stake is whether new jobs and industries take root in this country, or somewhere else. It's whether the hard work and industry of our people is rewarded. It's whether we sustain the leadership that has made America not just a place on a map but a light to the world," Obama said in his speech.
He urged Americans to seize what he called a "Sputnik moment" spurred by new spending in research and education like the 1950s space race unleashed when the Soviets launched the Sputnik satellite.
The challenge will be how he finances investment projects for future growth while addressing a dire fiscal outlook. On this Obama gave no hint, leaving details to his budget due next month.
Moreover, the freeze would not apply to the big entitlement programs -- such as the Social Security retirement program and the Medicare health insurance program -- at the heart of America's deficit problem.
Still, analysts praised the cautious start.
Robert Tipp, chief investment strategist at Prudential Fixed Income, called it an important shift towards fiscal restraint that debt markets need to see. "It's a big positive even with these baby steps towards that direction. At least he's teeing up these issues," he said.
Obama headed to Wisconsin on Wednesday to promote a retooled, more business-friendly approach aimed at reinforcing his move to the political centre that may be crucial to his chances of re-election in 2012.
Obama's visit to three Wisconsin plants, including a renewable energy company, was aimed at driving home his message of innovation and job creation.
U.S. stocks rose slightly after Obama's call for a lower corporate tax rate.
At the World Economic Forum in Davos, business leaders gave a mixed reaction to Obama's proposed austerity steps proposed, with some questioning whether they go far enough.
"American corporates and Western corporates are really uncertain, and I don't think last night's speech really gets us further in terms of removing that uncertainty," Martin Sorrell, CEO of WPP, the world's largest advertising group, told a panel.
(Additional reporting by David Morgan, Alister Bull, Andy Sullivan, Caren Bohan, Matt Spetalnick, Ross Colvin and Patricia Zengerle)
