updated 11/13/2009 3:07:24 PM ET 2009-11-13T20:07:24

The Obama administration has alerted domestic agencies to plan for a freeze or even a 5 percent cut in their budgets, part of an election-year push to rein in record deficits that threaten the economy and Democrats' political prospects next fall.

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China, the largest foreign holder of U.S. Treasury securities, has expressed concern about the size of U.S. deficits. U.S. policymakers worry that alarm over deficits could push foreigners into cutting back on their purchases of Treasury debt. President Barack Obama will visit China as part of his current tour of Asia.

White House budget director Peter Orszag said Friday that it is imperative to start curbing the flow of red ink in coming years so as not to erode the fledgling economic recovery and raise interest rates. But he called it a balancing act and said acting too fast could undercut the recovery.

Orszag wouldn't comment on the specifics of the upcoming budget, which will be unveiled in February, right after Obama's State on the Union address in which the initiative is sure to be a major focus.

Democratic officials in the White House and on Capitol Hill say options for locking in budget savings include caps on the amount of money Congress gets to distribute each year for agency operating budgets. The officials spoke on condition of anonymity to frankly discuss internal deliberations.

"As part of that fiscal 2011 budget, we will be putting forward proposals that will put us back on a fiscally sustainable path and that have lower deficits," Orszag said in a recent Associated Press interview. "I'm not going to get into the mix between spending and revenues. Obviously deficit reduction requires some combination of those two."

On Thursday, the government reported that the federal deficit hit a record for October as the new budget year began. The Treasury Department said the deficit for October totaled $176.4 billion, even higher than the $150 billion imbalance that economists expected. The deficit for the 2009 budget year, which ended on Sept. 30, set an all-time record in dollar terms of $1.42 trillion. That was $958 billion above the 2008 deficit, the previous record holder.

The budget freeze was planned before Democratic setbacks in last week's elections. But the bad results for Democrats — independent voters that were central to Obama's winning coalition last year voted roughly 3 to 1 for GOP gubernatorial candidates in Virginia and New Jersey — appear to have added urgency to the deficit-cutting drive.

Independents, pollsters say, tend to be more concerned about the deficit than other voters and getting them back in the Democratic column is crucial to the party' chances in midterm congressional elections.

Image: Peter Orszag
Charles Dharapak  /  AP
White House budget director Peter Orszag said Friday that it is imperative to start curbing the flow of red ink in coming years so as not to erode the fledgling economic recovery.

The mandate to domestic agencies to limit their budget requests for the 2011 budget year comes as an economic advisory board chaired by Paul Volcker is debating ways to reform the tax code. Virtually all budget experts say there will have to be revenue increases to make any significant dent in the deficit.

The White House edict to agencies to submit spending plans at least freezing their budgets is but one round in internal administration deliberations on the budget. Cabinet heads are sure to seek exemptions, and Orszag warned that firm budget decisions haven't been made.

Given Democrat's poor poll number on the deficit, cutting it may be a case in which the adage that good policy is good politics holds true.

Still, politicians have typically avoided politically painful deficit-cutting steps in election years and recent history has not been kind to politician who have tackled the issue.

Tax-raising deficit deals in 1990 and 1993 had big political consequences for President George H.W. Bush, who lost his re-election bid, and for President Bill Clinton, whose party lost control of Congress the following year.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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