Q+A: Possible steps to tackle the U.S. budget crunch

WASHINGTON (Reuters) - President Barack Obama, in his State of the Union speech on Wednesday, is expected to signal resolve to tame U.S. budget deficits, which have reached the highest level as a percentage of economic output since World War Two.

The Senate is expected to vote on Tuesday on a proposal that would set up a commission to consider unpopular measures like tax hikes or spending cuts to get deficits under control.

Meanwhile, conservative Democrats in the House of Representatives have said they will push a variety of other measures that could return budgets to a sustainable level.

Experts say the time is ripe for such efforts, before investors lose confidence in U.S. debt and force up interest rates. But many wonder whether Washington has the stomach for the remedies needed, or the willingness to work across party lines in a highly charged election year.

WHAT IS THE PROBLEM?

U.S. debt has more than doubled over the past decade to $12.27 trillion, thanks to a combination of tax cuts, wars in Iraq and Afghanistan, elevated domestic security spending and the deepest recession since the Great Depression of the 1930s.

The government posted a record $1.4 trillion deficit for the fiscal year ended September 30, 2009, and deficits are projected to remain stubbornly high over the coming decade as costs for retirement and healthcare programs rise.

This could spur investors including China, the biggest U.S. foreign creditor, to demand higher rates for Treasury bonds. That would push the government''s borrowing costs dramatically higher and crowd out spending in other areas.

"America has probably the worst economic future it''s ever had," said former Republican Senator Pete Domenici. "We could end up a second-rate world power without doing anything. It would just happen."

WHY A COMMISSION?

Commissions are a time-honored Washington method of outsourcing difficult decisions. Commissions have allowed Congress to close outdated military bases over the past two decades and shore up Social Security in the early 1980s.

But far more find their proposals simply gather dust.