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updated 4/28/2011 8:57:30 AM ET 2011-04-28T12:57:30

President Barack Obama's choice of expert budget-cutter Leon Panetta to lead the Defense Department is a clear signal that the White House perceives the nation's deficit crisis, not the wars in Iraq and Afghanistan, as its toughest challenge.

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After winning the presidency in November 2008, Obama asked Robert Gates to remain defense secretary as the administration struggled to bring clarity to the fog of two wars. In tapping Panetta to replace Gates, Obama is turning to a Washington insider and veteran of budget fights as the administration wrestles with reining in an estimated $1.6 trillion deficit.

A military budget that has doubled since the Sept. 11, 2001, terror attacks faces certain cuts amid the clamor from fiscal-minded lawmakers, emboldened Tea Partyers and an electorate insistent on Washington changing its spending habits. The prospect of the United States drawing down the number of troops in Iraq and Afghanistan pumps up the volume in the call for cuts.

Story: In one stroke, a new Obama national security team

Congress and the White House have moved to trim defense spending with the budget for the current fiscal year set at $513 billion, $18.1 billion less than the administration proposed.

In outlining his deficit-reduction plan, Obama called for slashing another $400 billion from defense over the next 12 years. The president's bipartisan fiscal commission recommended Pentagon cuts of $1 trillion over a decade.

Video: Panetta, Petraeus tapped for top security posts (on this page)

Enter Panetta, an eight-term congressman, former chairman of the House Budget Committee, one-time head of the Office of Management and Budget, White House chief of staff for President Bill Clinton and current CIA director.

"People are looking at the military budget in much sterner terms," said former Rep. Bill Frenzel, R-Minn., who worked closely with Panetta on the Budget Committee. "They're digging deeper than the president to settle the fiscal crisis. Defense has to give more. ... This will make Leon's job extremely difficult and very sensitive."

Chockablock agenda
If confirmed by the Senate, the 72-year-old Panetta will face a chockablock agenda — Pentagon spending, two wars and the ongoing U.S. military operation in Libya, certification that the military is ready to deal with openly gay members in its ranks, and the selection of a new chairman of the Joint Chiefs of Staff.

Gates told senior staff that he had recommended Panetta to Obama six months ago. A senior administration official, speaking on condition of anonymity in advance of the formal White House announcement, said Panetta was initially reluctant to leave the CIA for the Pentagon but eventually relented and decided he couldn't refuse the president.

"His approach to problems is very pragmatic," said former Rep. Lee Hamilton, D-Ind., who served with Panetta in the House and worked with him on the Iraq Study Group in 2006. "He's not hung up on ego or ideology. He doesn't die on his sword if others disagree with him."

Story: Obama stresses continuity as national security team evolves

Widely respected by Republicans and Democrats, Panetta is described by former colleagues as open and fair, willing to make concessions, and experienced in resolving disputes. He was a major player in the 1990 budget talks.

Panetta is the consummate multitasker, picked by Clinton to oversee OMB after his four years as Budget chairman, then asked to bring order to a Clinton White House as chief of staff. His experience with Hillary Rodham Clinton when she was first lady will serve him well as he works closely with the secretary of state.

Panetta is a Republican-turned-Democrat who once worked in the Nixon administration, quitting amid dissent over the president's civil rights policies. The Monterey-born, piano-playing Panetta often felt the pull of the California peninsula and the walnut farm in the Carmel Valley once owned by his father. When he served in the House, he returned home every weekend, often riding a tractor under cloudless skies.

He and his wife, Sylvia, established the Panetta Institute for Public Policy in Monterey in 1997.

Obama selected him for CIA director, an appointment that prompted some grumbling in Congress and national security circles that he lacked the background and experience. But Panetta has received good marks, and his constant presence in National Security Council meetings should ease the transition for a defense secretary dealing with Iraq, Afghanistan and Libya.

Video: Obama prepares to remake National Security Team (on this page)

'We're in a build-down'
The budget is a near-term issue as the congressional committees overseeing the Pentagon begin crafting a blueprint in May. In his last budget request, Gates sought $553 billion for the budget year that begins Oct. 1, plus $118 billion in war costs. The Pentagon is certain to face congressional efforts to cut spending.

"We're in a build-down. The game is over. This is all downside," said Gordon Adams, who worked with Panetta at OMB.

As OMB chief, Panetta calculated how much money each agency and department would get. Todd Harrison of the Center for Strategic and Budgetary Assessment sees him as a potential advocate for the Pentagon.

"I think having him on the DOD side of the budget battle now will be a real asset to DOD. He knows how OMB works, knows the inner workings of the budget process at the White House. So I think he will be better equipped to negotiate DOD's top line budget than any of the other candidates" who were considered, Harrison said.

Harrison said it is "kind of an unknown" what Panetta's views are on some of the major budget decisions that he'll face at the Pentagon. "It remains to be seen how he's going to favor people, force structure, modernization" or weapons programs, Harrison said of Panetta, who served as a first lieutenant in the Army from 1964-66.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: Panetta, Petraeus tapped for top security posts

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