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UPDATE 1-Obama’s budget to spark fight in U.S. Congress

President Barack ObamaFeb 25 (Reuters) – President Barack Obama sends his first budget proposal to the U.S. Congress on Thursday bracing for fights over how best to heal the economy, create a new healthcare system and still cut out-of-control deficits.

 Obama can take some comfort in knowing that his fellow Democrats in Congress — who control both chambers — most likely will not pronounce his budget "dead-on-arrival," as has happened so many times to past presidents.

Even so, experts think that over the next several weeks, as lawmakers craft their own budget blueprint in response to Obama's request, the popular new president could be in for his first real fight with Congress.

"It won't be smooth sailing," predicted Maya MacGuineas, president of the Committee for a Responsible Federal Budget, which wants tough controls to bring down deficit spending and reform expensive programs like Social Security and the Medicare healthcare program for the elderly.

Obama, elected last November in part on a promise to foster fiscal responsibility, has seen Washington push through almost $1.5 trillion in emergency spending since October to fight a 14-month recession and a spreading global credit crisis.

He says the spending binge is crucial to head off an bigger economic disaster. But it has riled Republicans, who accuse Obama of ramming through Democratic priorities with scant attention to bipartisan support.

Obama will be giving an outline of his budget on Thursday and is expected to fill in the details in coming weeks.

On Wednesday, a White House official said the budget includes a 10-year, $634-billion reserve fund to help pay for his proposed health care reforms. Half would be paid with new revenues and the other half would be funded by making the system more efficient.

A senior Democrat in the House, Representative John Murtha, told Reuters the proposal would also request a $537 billion U.S. military budget for next year. Murtha said he wasn't sure if that included money to pay for the wars in Iraq and Afghanistan next year.

CUTS AND FLASHPOINTS

Trouble could arise if Obama proposes cutting some domestic spending to pay for healthcare or education initiatives.

"Democrats (in Congress) may push back and say that's too aggressive" and counter that there is pent-up demand for higher domestic spending, she said.

At the same time, Republicans and moderate Democrats in the House of Representatives will be counting on Obama to hold to his promise to put the brakes on some domestic spending.

On Tuesday, House Republican leader John Boehner said Washington should institute "a spending freeze so we can get our budget in order." Since Democrats control the White House and Congress, Boehner's idea may not gain much traction.

Congress is bracing for a 10-year budget outlook from the White House that won't be pretty: federal spending topping $3 trillion a year and whopping budget deficits throughout Obama's first term.

While the White House promises to slice those deficits in half, administration officials say they still would be $533 billion in 2013, the year that analysts had previously hoped to see a balanced budget.

Some experts fear that if the record pace of government borrowing to finance debt continues, it could affect financial markets by raising interest rates for borrowers, which would slow economic growth.

Hopes of a balanced budget were dashed by the a severe economic recession that slowed government revenues. At the same time, federal spending is skyrocketing as officials stimulate the economy with $787 billion in spending and tax cuts and provide $700 billion to bail out the financial sector.

Obama's budget is expected to touch off a fierce fight over tax policy. Many of former President George W. Bush's tax cuts are due to expire at the end of next year and Obama has warned he has no intention of renewing the benefits for the wealthy.

That is one more wedge likely to be driven between Democrats and Republicans, further complicating Obama's drive for bipartisanship.

Congress hopes to pass a budget plan by early April and in the past two years, Democrats have had little support from Republicans. (Editing by David Storey)

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