1 of 4. The U.S. Marine Corps version of Lockheed Martin's F35 Joint Strike Fighter, F-35B test aircraft BF-2 flies with external weapons for the first time over the Atlantic test range at Patuxent River Naval Air Systems Command in Maryland in a February 22, 2012 file photo.

WASHINGTON (Reuters) - It's called the "death spiral," and America's newest warplane, the F-35 Joint Strike Fighter, is in danger of falling into it before the plane has even gone into service.

The term - recently invoked by top brass involved in the F-35 program - refers to a budgeting Catch-22 that plagues the defense industry. To keep the cost per airplane low, you need to build and sell a lot of planes. But in tough economic times, governments cut orders to save money. That pushes up the cost per plane, leading to more cancellations, pushing up the cost, leading to more cancellations. And so on.

The U.S. military is in the process of making tough decisions due to mandatory budget cuts from sequestration which went into effect March 1 and could lop off $46 billion of Pentagon spending this fiscal year.

Earlier this year, Pentagon budgeteers crunched the numbers on Lockheed Martin Corp's F-35 in an exercise that spoke volumes about the troubles facing the world's most expensive weapons system and the Navy's uncertain commitment to it.

Postponing orders for about 40 of the 260 Navy models of the plane, which will take off from and land on aircraft carriers, would save money in the short-term, according to several defense officials familiar with the analysis, which has not been made public.

But it would also add from $1 billion to $4 billion to the eventual price of the F-35 program, already at a record-setting $396 billion.

Seven years behind schedule and 70 percent over early cost estimates, the stealthy F-35 "Lightning II" appears to have overcome myriad early technical problems only to face a daunting new question: is it affordable in an era of shrinking defense budgets?

According to a congressional watchdog agency, the average price per plane has already almost doubled from $69 million to as much as $137 million since the F-35 program began in 2001. Any further price rise could scare off potential buyers -including vital foreign customers.

"It's a house of cards," said one senior defense official who is familiar with the F-35 program, but was not authorized to speak publicly. "We have finally started improving performance on the program and efficiency in testing, and bang, we get this budget challenge."

Steve O'Bryan, one of Lockheed's top F-35 executives, says the company has already cut F-35 production costs by 50 percent, and is making progress on flight tests and software development.

"While there are still challenges and room for improvement, the program is heading in the right direction and we see no insurmountable obstacles to delivering the F-35 and its unprecedented 5th generation capability to our three U.S. service and international customers," he said.

BULLET PROOF?

Built by Lockheed and designed to be the next-generation fighter jet for decades to come for the U.S. Air Force, Navy and Marines, as well as key U.S. allies in Asia and Europe, the F-35 appears bullet-proofed against cancellation.

There are no other new fighter jets in the pipeline; the U.S. military's fleet of warplanes is aging; and 10 allies including Britain, Japan and Israel are deeply invested.

Manufacturing - and jobs - spread across 46 states ensure a vital layer of political protection as well.

With 10 million lines of software code onboard, and another 10 million lines in its logistics and ground systems, the F-35 is a flying computer with radars and other sensors that can see enemy threats 200 miles away in any direction.

In what was meant to be a money-saving move, U.S. officials designed the F-35 as one basic fighter (with three variants) to replace a dozen warplanes flown by the U.S. Air Force, Navy and Marine Corps, as well as U.S. allies worldwide.

The U.S. armed forces currently plan to buy 2,443 F-35s in total, comprising 1,763 A-models for the Air Force, 420 B- and C-models for the Marines, and 260 C-models for the Navy. Foreign orders are now slated to total 721.

The Marine Corps, under pressure to replace its aging fleet of Harrier AV-8B "jump jets", Boeing Co F/A-18 Hornets, and EA-6B Prowlers, is scheduled to be the first U.S. military service to use the jet, by late 2015.

Given the tight schedule and huge cost of keeping its aging current fleet flying, top Marine Corps officials are vigilant about the program and the budgetary risks it faces.

"Any delay in fielding the F-35 brings added risk to the Marine Corps' ability to execute our mission as the nation's crisis response force and it affects our ability to augment U.S. Navy carrier air wings," Lieutenant General Robert Schmidle, Deputy Commandant of Aviation, said in a statement to Reuters.

Schmidle and other planners at the Pentagon are desperate to avert the "death spiral" that gutted the Air Force's plan to buy 750 F-22 Raptor stealth fighters down to just 187 jets.

Behind closed doors, some U.S. officials fret that sequestration budget cuts could trigger a similar dynamic on the F-35, which has already seen 410 orders pushed back beyond 2017.

Depending on how the cuts are implemented, the purchase of up to nine F-35s could be deferred in fiscal 2013 alone, Navy and Air Force officials have said. That might not seem like much out of more than 3,100 destined for U.S. and foreign clients.

But initial calculations show that while cutting nine jets would save about $1.3 billion, it would also raise the cost of the remaining aircraft by nearly $800 million, said one defense official, who was not authorized to speak publicly.

The Pentagon budget analysis, which Reuters is reporting for the first time, found that postponing the 40 Navy C-model jets would raise the cost of the Navy version by about $4.5 million per plane, and add between $1.5 million to $2.6 million to the per-plane cost of the Air Force and Marine Corps versions, according to several defense officials familiar with the study.

"Cutting tails to pay bills is inefficient. Whether it's nine planes in one year, or 40 across the (future years defense plan), you're going to pay later," said one of the officials. This official and others cautioned that the studies were hypothetical for now.

Air Force Lieutenant General Christopher Bogdan, the often blunt F-35 program chief, invoked the dreaded "death spiral" this week as he pounded on the need to cut costs and keep foreign orders - which will account for half of all F-35s produced through 2017 - on track.

"The one thing that our partners care most about is how much this airplane is going to cost," he said. "If ... we want to sell the 600-plus airplanes to our partners and a couple hundred more projected to our (foreign military) customers, we better be darned sure we keep reducing the price on this airplane."

Even a two-year delay in Turkey's initial order of two jets had added $1 million to the cost of each of the remaining planes in the original order year, Bogdan told a defense conference.

No one knows exactly how much of a price tag will be too much to bear for countries like Australia and Canada, whose F-35 orders are already on shaky ground. "The tipping point will be different for each country," said one U.S. official.

In Australia, defense contractors involved in building the new jets are worried that $5.5 billion in expected orders will be in jeopardy if Canberra cuts its plans to buy 100 jets by 30 to 50 jets, as many experts expect.

Lockheed remains optimistic that international orders will hold up and even grow. South Korea is expected to choose the F-35 as the winner of a 60-jet competition to be decided this summer, and U.S. officials this week said Singapore may order more than a dozen F-35s in coming weeks.

Other allies, like Japan, see no going back on the fighter.

A senior official at Japan's Defense Ministry said it was keeping a close eye on cost and schedule risks, but there were no plans to change Tokyo's order for 42 planes: "If we don't buy until all the glitches are eliminated, it would be too late."

NAVY IS WARY

The Air Force is considering a slightly less capable version of the plane for its initial use, but the Navy is reconsidering the size of its order.

Chief of Naval Operations Admiral Jonathan Greenert this week ruled out scrapping the Navy's entire F-35C order, but said the Navy was thinking about how many jets it really needs.

Greenert last year ordered a study on equipping each aircraft carrier air wing with just one squadron of F-35s instead of two, according to defense analyst Loren Thompson. The Navy is also developing several unmanned planes, although military officials insist they will never completely replace manned fighters on carriers.

Bogdan said cutting the Navy's order too far would have serious consequences. "There is actually a 'do not go below' type of calculation, which says, if you get below the minimum production quantity on one of these variants, the price starts shooting up tremendously," he told the conference.

The Pentagon's Cost Analysis and Program Evaluation office recently forecast that the F-35's cost would rise by 9 percent if Washington only bought 1,500 jets and foreign partners stuck to their orders, according to a Government Accountability Office study, first reported by Reuters. The cost would surge 19 percent if Washington bought 1,500 jets and the partners none.

"If you cut any of these aircraft, the cost of each remaining one goes up," consultant Thompson said. "At some point soon, you're at risk of undermining the whole business case for the F-35 as an affordable new fighter."

The F-35's worsening fiscal challenges come just as advocates, and some independent analysts, say the often-troubled fighter development project is getting back on track after years of setbacks - which included two engine-related groundings this year - and expensive retrofits.

The F-35 "is now moving in the right direction after a long, expensive and arduous learning process," the GAO study concluded, although it said long-term affordability remained a big concern.

Top Pentagon officials are vowing to shelter the F-35 from the latest budget crisis, if they can.

"We'll try to protect the F-35," the Pentagon's chief weapons buyer, Frank Kendall, said this week. "There's no question about its priority.

(Additional reporting by Kiyoshi Takenaka in Tokyo and John O'Callaghan in Singapore; Editing By Warren Strobel, Claudia Parsons and Leslie Gevirtz)

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House Ways and Means Committee Chair Dave Camp (R-MI) questions U.S. Secretary of the Treasury Timothy Geithner in Washington February 15, 2012.

WASHINGTON | Fri Feb 15, 2013 6:43pm EST

WASHINGTON (Reuters) - A top Republican lawmaker has challenged the widely respected congressional forecaster on budget issues, the Congressional Budget Office, accusing it of a slanted report on taxing corporate profits, according to documents released on Friday.

A 36-page January CBO report concluded that tens of billions of dollars in new government revenue could be raised over a decade by limiting corporations' ability to defer taxes on foreign profits, a tax change favored by President Barack Obama.

The change, which would raise companies' tax bills, would boost efficiency and raise about $114 billion over 10 years, CBO estimated.

The prediction didn't sit well with Dave Camp, the Republican chairman for the U.S. House of Representatives' tax-writing Ways and Means Committee, who backs moving to a territorial tax system and is working on legislation to overhaul the entire U.S. tax code.

Under the territorial approach companies could bring foreign profits home with little or no corporate income tax imposed on a permanent basis, not just during a temporary, one-year holiday.

In an unusual move, Camp wrote to non-partisan CBO requesting an explanation of the report's methods, calling it "heavily slanted and biased in favor of one particular approach," according to a copy of the letter dated January 24 and released by Camp's office on Friday.

The Michigan lawmaker released his original letter after the CBO released an official response on Friday.

CBO director Douglas Elmendorf said he believes the report presents "key issues fairly and objectively and that its findings are well grounded in economic theory and are consistent with empirical studies in this area."

Still, the CBO director said that "because of the complexity of the subject and the diverse views of experts in the field, we agree that it would have been desirable to seek comments from more outside reviewers."

One of the experts cited by CBO was a former Obama administration official. Another academic has written critically of corporations skirting taxes abroad.

CBO said new revenues generated by the White House's approach would exceed new revenues available under the territorial system, favored by many corporations.

The territorial system, as promoted by corporate lobbyists and Republicans in Congress, would raise $76 billion over a decade, under one estimate cited by the CBO.

(Reporting by Kim Dixon; Editing by Todd Eastham)

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U.S. House Speaker John Boehner (R-OH) arrives to speak to the media on the ''fiscal cliff'' on Capitol Hill in Washington, December 21, 2012.

WILLIAMSBURG, Virginia | Fri Jan 18, 2013 2:59pm EST

WILLIAMSBURG, Virginia (Reuters) - House Republican leaders on Friday said they would seek to pass a three-month extension of federal borrowing authority next week to buy time - on pain of losing their own paychecks - for the Democratic-controlled Senate to pass a budget plan that shrinks budget deficits.

The plan, hatched at a House Republican retreat, marks a new strategy from the party to break a budget deadlock by forcing the Senate to act first.

The Treasury needs congressional authorization to raise the current $16.4 trillion limit on U.S. debt sometime between mid-February and early March.

The Senate has not passed a formal budget resolution in nearly four years, while the House has passed budgets that have died in the Senate.

Under the planned legislation, House Majority Leader Eric Cantor said if the Senate or the House fail to pass a budget by April 15, lawmakers' pay would be withheld.

"Next week, we will authorize a three-month temporary debt limit increase to give the Senate and House time to pass a budget," Cantor said in an emailed statement.

"If the Senate or House fails to pass a budget in that time, members of Congress will not be paid by the American people for failing to do their job. No budget, no pay," he said on the last day of a House Republican retreat in Williamsburg.

U.S. House Speaker John Boehner said there should be no long-term increase in the federal debt limit until the Senate passes a budget, and House Republicans will try to force the Senate into action to cut spending.

"We are going to pursue strategies that will obligate the Senate to finally join the House in confronting the government's spending problem. The principle is simple: no budget, no pay," Boehner said in excerpts of his closing remarks to the retreat at a golf resort in Williamsburg.

Adam Jentleson, a spokesman for Senate Majority Leader Harry Reid, said the Senate would consider the increase if it was "clean."

"It is reassuring to see Republicans beginning to back off their threat to hold our economy hostage," Jentleson said in an emailed statement. "If the House can pass a clean debt ceiling increase to avoid default and allow the United States to meet its existing obligations, we will be happy to consider it."

Congress has relied largely on stop-gap funding measures to keep government agencies and programs running.

A House Republican leadership aide said it was not currently anticipated that the three-month debt limit increase legislation would include spending cuts. Although Boehner has previously sought at least $1 in long-term spending cuts for every dollar of debt limit increase, the aide said that the reforms associated with requiring budgets from both chambers would meet the speaker's requirements.

Spending cuts would be demanded of any longer term debt limit increase, the aide said, and Congress would still have to continue dealing with two other fiscal deadlines, the March 1 launch of automatic spending cuts, and government funding legislation that is needed by March 27.

(Reporting by David Lawder; Editing by Jackie Frank)

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U.S. President Barack Obama announces that White House Chief of Staff Jack Lew (R) will be his nominee for U.S. Treasury Secretary, replacing Timothy Geithner (L), in the East Room of the White House in Washington, January 10, 2013.

WASHINGTON | Thu Jan 10, 2013 7:53pm EST

WASHINGTON (Reuters) - President Barack Obama broke the mold on Thursday by choosing a budget wonk to serve as U.S. Treasury secretary, leaving gaps on the international and financial side that could make for a rocky transition.

Jack Lew, Obama's chief of staff, was chosen to lead the Treasury Department as the White House heads into another round of difficult talks with Congress on how to put the nation on a sound fiscal path.

By tapping a two-time White House budget director, Obama signaled the importance he places on the ongoing budget battles.

If the Senate confirms Lew, as widely expected, the budget expert's most pressing task will be to ensure that Congress raises the nation's debt ceiling in time for the United States to avoid a damaging default and credit-rating downgrades.

In selecting a Washington insider, Obama has potentially left the Treasury Department with holes in crucial areas: financial markets, regulation and international economics.

Obama's outgoing Treasury secretary, Timothy Geithner, was previously president of the New York Federal Reserve Bank, where part of his job was to liaise with Wall Street and regulate big banks. He also had held top positions in President Bill Clinton's Treasury Department and at the International Monetary Fund.

Geithner's immediate predecessor, former Goldman Sachs CEO Hank Paulson, was also deeply steeped in the ways of Wall Street, as was Geithner's boss during the Clinton administration, then-Treasury Secretary Robert Rubin.

"Jack Lew is by all accounts highly qualified to be secretary of the Treasury," said Dennis Kelleher, the chief executive of the left-leaning group Better Markets, which supports tougher financial regulation.

"The one area of concern is whether or not he is sufficiently committed to quickly and thoroughly implementing financial reform and re-regulating Wall Street."

WALL STREET SHORT-TIMER

Bankers and other financial services executives privately expressed concern that Lew lacked financial markets experience, even though he worked on Wall Street for two years. Sheila Bair, a former bank regulator, told CNBC television on Wednesday that "someone with a little broader perspective would be good."

Lew, who is known as a strong administrator, admitted his financial experience was scant when he was vetted by the Senate to serve as a State Department deputy secretary and then as Obama's budget chief.

At a Senate Budget Committee hearing in September 2010, he was pressed by Senator Bernie Sanders for his views on whether deregulation contributed significantly to the 2007-2009 financial crisis.

"I don't consider myself an expert in some of these aspects of the financial industry," Lew responded. "My experience with the financial industry has been as a manager, not as an investment adviser."

"I don't personally know the extent to which deregulation drove it, but I don't believe that deregulation was the, you know, proximate cause," he added.

Those comments upset Sanders, a political independent who supports tougher regulation. Sanders voted against Lew's selection as budget chief, and on Thursday said he was prepared to vote against him again.

While Lew is expected to win confirmation, he could face a fair amount of opposition from a combination of left-leaning, pro-regulation lawmakers like Sanders and Republicans who have clashed with the nominee in past budget talks.

During his time on Wall Street, Lew was the chief operating officer of Citigroup's global wealth management division. He later became COO for Citi Alternative Investments, a largely administrative role that was apart from investment decisions that portfolio managers would have made.

"I found that things he was responsible for doing worked better after he joined," said Todd Thomson, who headed Citigroup's wealth management unit in 2006 and hired Lew. "He's very good at working across an organization, and bringing people together to resolve issues."

Lew joined Citi on the recommendation of former Treasury Secretary Robert Rubin, who was then chairman of Citigroup's executive committee. Rubin knew Lew from their time together in the Clinton administration.

LEW WHO?

Outside of Washington policy circles, Lew is little known. A number of financial officials in Asia and Europe drew a blank when asked by Reuters for their appraisal.

"People in the know should know a person who has served as OMB (Office of Management and Budget) chief. To me he is a total stranger," said one official of a Group of 20 nation.

As Treasury secretary, Lew will not only have to represent the United States on the global stage, but he will have to deal with a host of tricky international economic problems from the challenges presented by China's growing economic clout to Europe's debt crisis.

One euro zone official involved in fighting the region's debt problems said he was encouraged by Obama's pick.

"The sign it sends is that (the United States) will be serious about the deficit and fiscal policy since (Lew) is an experienced fiscal policy specialist," the official said.

If confirmed, Lew would come to the Treasury Department at a critical time for regulation. The Treasury secretary is essentially a regulator-in-chief who chairs the relatively new Financial Stability Oversight Council, a panel comprised of the country's top banking and market regulators.

As chairman, he would have the authority to veto any FSOC initiative, even if all of the other members disagree.

The council is currently receiving comments on a controversial framework that proposes stringent new regulations on money market funds. It is also close to imposing additional rules on a handful of large, complex financial institutions meant to ensure they never threaten the stability of the financial system.

Both initiatives could be put on hold as Lew gets up to speed, or a top deputy could be required to play a bigger role.

QUICK STUDY

The 57-year old Lew is considered a quick study.

He was a rising star when he served as a top policy adviser to then-House of Representatives Speaker Tip O'Neill in the 1980s, a Democrat who worked with Republican President Ronald Reagan to reform the tax code and put the Social Security retirement program on more solid footing.

Former Securities and Exchange Commission Chairman Arthur Levitt said Lew could handle any issue and that his lack of regulatory experience was not a problem.

Levitt said Lew was a strong defender of the SEC when Republicans once threatened to cut the agency's budget over rules Levitt pushed to reduce auditor conflicts of interest. "I would say Jack Lew is probably a better person from an investor's point of view than anyone I could think of," he said.

The Chamber of Commerce, the country's biggest business lobby, and other influential trade and lobby groups also said Lew has the skills for the top U.S. economic post.

Lew's selection could put pressure on the Obama administration to find a deputy with business and financial experience to help round out Lew's deep knowledge of Congress and the budget. Current Treasury No. 2 Neal Wolin is expected to depart once he assures a smooth transition is in place.

"It's important (Lew) has people around him who understand the markets," said Tom Quaadman, a vice president with the Chamber. "So I think it will be more telling, to a degree, who he brings with him into the department itself."

(Additional reporting by David Henry, Dan Wilchins, Jan Strupczewski, Tetsushi Kajimoto and Andrew Quinn; Editing by Tim Ahmann and Will Dunham)

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SEOUL | Sun Dec 30, 2012 11:14pm EST

SEOUL (Reuters) - South Korea's parliament was expected to pass next year's government budget on Monday after slightly expanding welfare spending programs in line with President-elect Park Geun-hye's campaign pledges.

Media cited officials at the ruling and main opposition parties as saying they now aimed to put their agreed version up for vote later in the day after winding up debate on minor issues at sub-committee meetings.

The value of the 2013 budget bill is expected to rise to about 342.7 trillion won ($320.11 billion) from 342.5 trillion won, but there would be no big change in funding plans, media reports said.

The government's plan is to narrow the official fiscal deficit to 0.3 percent of gross domestic product in 2013 from a projected 1.1 percent deficit in 2012.

The fiscal year begins on January 1 but parliament has often delayed budget approval until after midnight on December 31 due to wrangling between the ruling and opposition parties.

The government had proposed to allocate 28 percent of total spending to health, welfare and labor but Park promised this month to increase welfare spending.

Park, from the ruling conservative Saenuri Party, does not take office until late February.

Technically, the ruling party holds 51.3 percent of the single-chamber National Assembly and can pass the bill alone but wants to reach agreement with the opposition first. The main opposition Democratic United Party holds 42.3 percent.

($1 = 1070.575 won)

(Reporting By Se Young Lee; Editing by Choonsik Yoo and Nick Macfie)

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LISBON | Sun Oct 14, 2012 7:02pm EDT

LISBON (Reuters) - Portugal's center-right government presents its 2013 budget on Monday, which will outline the harshest measures yet under Lisbon's 78-billion-euro bailout and is likely to mark the end of the country's so far reluctant acceptance of austerity.

The budget will face immediate opposition from angry Portuguese, who plan to march on parliament to demand the resignation of the government and an end to austerity, which has sent Portugal into its worst recession since the 1970s.

The 2013 budget is set to introduce sharp income tax hikes, which could amount to up to two or three months' wages for middle income workers, to ensure the country meets its budget goals under the bailout. Finance Minister Vitor Gaspar has described the planned tax increases as "enormous."

Economists fear that the tough measures, which will also include pension cuts, a financial transaction tax and higher property taxes, could push Portugal into a recessive spiral like Greece, further undermining Europe's German-inspired austerity drive for the euro's highly-indebted countries.

The austerity moves in the 2013 budget came after the government announced last month a rise in social security contributions, which it subsequently dropped after mass protests erupted. The opposition to the alternative tax measures is set to be equally strong.

Even Portugal's conservative president, Anibal Cavaco Silva, criticized the budget measure. "In the current circumstances, it is not correct to demand of a country being subjected to a budget adjustment process that it meets the targets at any cost," Cavaco Silva wrote on his Facebook page.

Before September, Portugal had shown a relatively high level of political consensus and support for cutting costs and the bailout it sought in 2011. But that support has been eroded, with the main opposition Socialists now pledging to vote against the budget when it is put to parliament at the end of the month.

Protests have now become frequent, though still peaceful. A general strike is planned for November 14.

LAST MINUTE DEBATE

The ruling center-right Social Democrats hold a comfortable majority in parliament together with their smaller allies, the rightist CDS. But the CDS has a long history of opposing higher taxes and analysts say the party's complete support of the government can no longer be taken for granted, especially if the economy deteriorates further.

Local media reported that the government was still locked in an internal debate at the weekend on the possibility of finding more areas for spending cuts in order to ease the tax hikes. The budget is expected to be detailed on Monday afternoon.

The economy is expected to contract at least 3 percent this year and the government expects a contraction of just 1 percent in 2013 -- a forecast widely doubted by economists. Unemployment is already at record highs above 15 percent and the government expects it to rise to 16.4 percent next year.

The 2013 draft budget may include new economic forecasts for next year.

This year's budget performance was undermined by tax revenues falling short of expectations as the recession deepened and unemployment rose beyond government forecasts.

(Reporting By Axel Bugge; Editing by Rosalind Russell)

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Greek and others European national flags flutter near an euro symbol outside the EU Parliament in Brussels August 30, 2011.

BRUSSELS | Sun Oct 7, 2012 6:54am EDT

BRUSSELS (Reuters) - Debate about the idea of creating a separate budget for euro zone countries is intensifying in the run up to an EU summit later this month, with less opposition to the proposal than many officials first expected, diplomats say.

At a private dinner held last week among the EU ambassadors of several northern European countries, including Britain, Denmark, the Netherlands and Finland, those present were surprised to find a fair degree of consensus on the proposal.

"I wouldn't say that there was strong support for it, but there was certainly a feeling that this is an idea that should be explored in more detail," said one diplomat briefed on the discussion that took place at the gathering.

The single budget proposal was first sketched out by Herman Van Rompuy, the president of the European Council, in a paper circulated in September as part of an effort to stimulate debate about how Europe's monetary union should be improved.

In the paper, Van Rompuy said a "fully fledged fiscal union" among the 17 countries that share the euro could involve the creation of a single treasury office and "a central budget whose role and functions would need to be defined".

Those suggestions have since been refined into guidelines that will form the basis of discussion among EU leaders at the summit on October 18-19. The idea will also be explored among euro zone finance ministers at a meeting in Luxembourg on Monday.

There is still no clear definition of what a single, central budget would entail, but Germany strongly supports the idea and France is on board too, which in terms of euro zone decision-making means it has substantial momentum.

Britain's support, underlined by Prime Minister David Cameron on Sunday, is also significant, even if it stems more from a desire to distance Britain from the problems of the euro zone than from any solidarity with the single currency club.

"There will come a time when you need to have two European budgets, one for the single currency, because they are going to have to support each other more, and perhaps a wider budget for everybody else," Cameron told the BBC on Sunday, the first day of his Conservative Party's annual conference.

"I don't think we will achieve that this time, but it is an indicator of the way that Europe is going," he said.

SINGLE EURO ZONE BUDGET

While conceptually it may make sense for the countries that share one currency to also create a single budget, it immediately raises thorny questions about sovereignty, budget discipline and long-term ambitions.

Germany's precise ideas about how a single budget would be financed, managed and employed are likely to be vastly different from Portugal's, Estonia's, Italy's or France's once leaders and finance ministers get into the nitty-gritty of the concept.

Yet there are already some broad proposals doing the rounds, including the idea -- backed by France -- that the budget could be financed by revenue from a financial transactions tax (FTT).

Germany and France are already driving an initiative to establish an FTT among nine euro zone, the minimum number permitted to do it alone. There is already support from eight countries and a ninth could come on board as soon as next week, giving added impetus to the plan.

But other euro zone countries that might like a single budget, such as Finland, are lukewarm on the idea of an FTT, underscoring just how complex negotiations could become.

There are also differences of opinion about why a single budget is desirable. Germany sees it as a means of building solidarity and tightening budget rules without moving to the more extreme suggestion of mutualizing all euro zone debt.

France sees a single budget more as a means of ironing out divergences in social and employment policy, arguing that it could be used to help underwrite unemployment benefits in a country suffering from much higher joblessness than the rest.

While many countries are voicing quiet support for the idea, it is also clear that most have a conflicting take on what it would involve if it were ever to become a reality.

Some have hinted that it could involve each country setting aside a fraction -- 0.3 or 0.5 percent of their GDP -- for a communal budget, others dismiss that suggestion out of hand.

"The modalities are completely unknown," said one EU official when asked how a single budget might work.

What's more, even if momentum is growing and it is likely to be a core part of discussions at the October 18-19 summit, it could be years before it becomes reality even if everyone supports it.

Such a fundamental change to how the euro zone is administered would more than likely require a change to the EU treaty, a long, complex and divisive process.

The treaty has already been tinkered with since the debt crisis began and there is a reluctance to open it up again.

Even if German Chancellor Angela Merkel were to support treaty change, it's unlikely she would want to do it until after Germany holds elections in September next year.

But there are also European Parliament elections in June 2014 and most analysts of euro zone politics do not expect it to be possible to drive through substantial treaty change until after that, meaning it may only happen in late 2014 or 2015.

(Additional reporting by Guy Faulconbridge in Birmingham and Robin Emmott in Brussels, Writing by Luke Baker; editing by Ron Askew)

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Greek Finance Minister Yannis Stournaras leaves after a meeting with Prime Minister Antonis Samaras at the Prime Minister's office in Athens September 20, 2012.

ATHENS | Fri Sep 28, 2012 10:22am EDT

ATHENS (Reuters) - Greece will unveil a draft budget for 2013 on Monday which will cut deeper into public spending to impress international lenders but also prolong the economic pain of the Greek people.

Athens is keen to see its bailout funding resume as its next 31.5 billion euro tranche has been pushed back while inspectors from the European Commission, European Central Bank and International Monetary Fund decide if its current program of cuts is on track.

Greeks are bracing for more pain to bring the country's public finances closer to a primary surplus - where all spending other than debt interest is covered by taxes - a milestone on the road to coming to grips with its debt mountain.

Greek police clashed with hooded rioters as tens of thousands took to the streets of Athens on this week in the country's biggest anti-austerity protest in more than a year.

Greece becomes the latest euro zone member to tighten their budget further, with Spain and France this week also seeking to prove they can make the cuts needed to keep lenders and markets onside.

Next year's budget will include more cuts in public sector pay, pensions and welfare benefits as part of an 11.5 billion euro austerity package of savings that will be spread out over the next two years.

"It's going to be a tough budget, projecting a sixth year of recession," a senior government official told Reuters. "It will focus on further savings, incorporating measures agreed by the political leaders."

"This budget will be another step to get the country closer to financial independence, reducing the state's operating costs," the official said.

After weeks of haggling over budget cuts, Prime Minister Antonis Samaras's allies in the coalition government have struck a deal on the composition of the package of savings and are ironing out the final details.

Athens needs to seal the deal soon so it can push the austerity package through parliament before an October meeting of euro zone finance ministers.

Another government official who declined to be named told Reuters next year's draft budget will embody a substantial chunk of some 7.5 billion euros of spending cuts that are part of the austerity package.

Struggling to shrink its budget hole to 7.3 percent of national output this year from 9.1 percent in 2011, Greece will likely miss the target as a percentage of GDP as its economy slumped by a deeper-than-projected 7 percent.

The EU Commission had forecast an economic contraction of 4.7 percent in 2012 but belt-tightening took a bigger toll on economic activity, suppressing domestic demand and driving the jobless rate to a record 24.4 percent.

As a result, this year's primary deficit - which excludes debt servicing costs - will also exceed a targeted 1.0 percent of gross domestic product (GDP). The finance ministry expects the primary deficit at 1.5 percent of national output.

"The new budget will be challenging. The government will need to generate a primary surplus for the first time in many years," said Eurobank economist Platon Monokroussos.

"Based on my estimates, Greece needs a primary surplus of at least 1.5 percent of GDP to stabilise and start a gradual reduction of its public debt-to-GDP ratio," he said.

(Writing by George Georgiopoulos; Editing by Toby Chopra)

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1 of 9. Protesters shout slogans during a protest against cuts in public education in central Madrid September 27, 2012.

MADRID | Thu Sep 27, 2012 7:59pm EDT

MADRID (Reuters) - Spain announced a crisis budget for 2013 based mostly on spending cuts on Thursday in what many see as an effort to pre-empt the likely conditions of an international bailout.

Ministry budgets were slashed by 8.9 percent for next year and public sector wages frozen for a third year as Prime Minister Mariano Rajoy battles to trim one of the euro zone's biggest deficits.

"This is a crisis budget aimed at emerging from the crisis ... In this budget there is a larger adjustment of spending than revenue," Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a marathon six-hour cabinet meeting.

Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Rajoy is resisting market and diplomatic pressure to apply for a rescue, partly out of concern for national sovereignty but also because European Union paymaster Germany insists Spain doesn't need help.

The central government sees budget savings of 13 billion euros in 2013, with spending down 7.3 percent -- not including social security and interest payments -- and income rising 4 percent thanks to a 15 percent leap in value-added tax take.

The budget goes to parliament on Saturday and debates could last weeks. The country's 17 autonomous regions still must present budgets and find an additional 5 billion euros in adjustments to meet overall public deficit reduction goals.

Spain, the euro zone's fourth largest economy, is now at the center of the euro debt crisis. Investors fear Madrid cannot control its finances and question whether Rajoy has the political will to take all the necessary but unpopular measures.

Madrid is talking to EU authorities about the terms of a possible aid package that would trigger an European Central Bank bond-buying program and ease Spain's unsustainable funding costs.

Brussels has demanded an independent budget oversight body, which Economy Minister Luis de Guindos said on Thursday would be created to review budget execution. The government is still analyzing potential conditions for aid, he said.

The conservative government said tax revenue would be higher than originally budgeted in 2012 -- partly due to a hike in VAT -- allowing it to comfortably cut the public deficit to 6.3 percent from close to 9 percent last year.

Uncertainty over Spain's ability to control spending in regional governments -- which account for half of all public spending and could threaten the deficit goal -- has increased due to the Catalan demands for independence.

The autonomous region's parliament voted on Thursday to hold a referendum on independence, but Saenz de Santamaria said the region must consult the rest of the country first.

PENSIONS WILL BE REVIEWED

Pensions, earmarked by the European Commission as a key area for reform, will rise by 1 percent next year but Treasury Minister Cristobal Montoro would not be drawn on whether the government would pay an inflation catch-up which could be over 3 percent this year.

In a sign of how tight the budget is this year the government said it would use 3 billion euros from social security reserves to pay pensions in 2012.

Before the end of the year the government will announce a pension reform to restrict early retirement and to review sustainability of the pension system which could open the door to accelerating an increase in retirement age.

The deputy premier said the government would set out 43 new laws to reform the economy over the next six months and including reforms to the labor market, public administrations, energy services and telecommunications sectors.

The detailed timetable for economic reforms goes beyond what the European Commission has required and is an ambitious step forward, the EU's top economic official said on Thursday in response to the government announcements.

"The reforms are clearly targeted at some of the most pressing policy challenges," EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.

Market reaction was cautious.

"The first impressions (of the announcements) are good, heading towards a major adjustment in spending rather than in revenues," said Jose Luis Martinez of Citigroup in Madrid.

"However, we see as too optimistic the macroeconomic assumption of 0.5 percent recession for the next year. We see a scenario with a deeper recession and if this were the case, further spending cuts will be needed."

De Guindos' statement that the 2012 budget deficit target would be met this year due to a solid increase in revenues will also be viewed with suspicion with many economists expecting the government to miss the objective.

Spending cuts continue to heap pressure on Spaniards and are likely to fuel further street protests, which have become increasingly violent as tensions rise and police use force to disperse crowds.

A quarter of all Spanish workers are unemployed and tens of thousands have been evicted from their homes since a housing bubble burst in 2008 and plummeting consumer and business sentiment tipped the country into a four-year economic slump.

The prime minister's image, both at home and abroad, has deteriorated rapidly since his party won an absolute parliamentary majority last November.

Newspaper pictures of Rajoy enjoying a cigar on Sixth Avenue in New York on Wednesday while protesters gathered in Madrid fuelled criticism of his detached attitude toward Spain's mounting problems.

(Additional reporting by Julien Toyer; Writing by Paul Day; Editing by Fiona Ortiz, Jeremy Gaunt, Paul Taylor and Giles Elgood)

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