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U.S. president-elect Barack Obama, flanked by budget director-designate Peter Orszag, left, and deputy budget director-designate Rob Nabors, speaks at a news conference in Chicago on Tuesday. ((Charles Dharapak/Associated Press))

Barack Obama has named Peter Orszag as his pick for White House budget director, where he will oversee a belt-tightening push the U.S. president-elect says is a "necessity."

Orszag, now the head of the congressional budget office, will ensure "a more efficient and effective" government, Obama said Tuesday at a noon news conference in Chicago.

With the U.S. country confronted by a crumbling economy, "Budget reform is not an option. It's a necessity," Obama told reporters.

Separately, news services reported that Defence Secretary Robert Gates will be held over in that job for at least a year.

The Associated Press said Obama is expected to announce the choice of Gates, President George W. Bush's defence chief for the past two years, next week. It attributed the information to an unnamed official familiar with the two men's discussions.

Orszag, 39, oversees a staff of 235 people and an annual budget of roughly $40 million at the congressional budget office. During the Clinton administration, he served as special assistant to the president for economic policy and senior economic adviser at the National Economic Council.

Orszag will be charged with the task of reviewing federal spending programs.

"We are going to go through our federal budget, as I promised during the campaign, page by page, line by line, eliminating those programs we don't need and insisting that those that we do need operate in a sensible, cost-effective way," said Obama.

Unclear yet where cuts will be made

He did not specify where he would make spending cuts, although he singled out a report that indicated farmers earning more that $2 million US still received $49 million in crop subsidies.

"Now, if this is true … it is the prime example of the kind of waste that I intend to end as president."

Obama also signalled that a priority for his administration will be lowering health-care costs, which he called "one of the biggest long-run challenges our government faces."

The president-elect's call for restraint stood in contrast to his comments on Monday, when he called on Congress to pass what is expected to be a massive stimulus package to boost the economy. While Obama has not indicated how much the package would cost, Democratic lawmakers have speculated it could total between $500 billion and $700 billion.

Earlier Tuesday, the U.S. Federal Reserve and Treasury Department pledged $800 billion to help boost the flow of lending for mortgages, students, cars, credit cards and small businesses. Most of that money — $600 billion — will be used to buy mortgage-backed debt and securities, said Treasury Secretary Henry Paulson.

The remaining $200 billion will be lent to holders of highly rated asset-backed securities supported by newly and recently issued consumer and small business loans.

"We are going to have to jump-start the economy … but we have to make sure that those investments are wise. We have to make sure we are not wasting money in every area," said Obama.

Nabors to be deputy budget director

He also named Rob Nabors as deputy budget director. Nabors will help Orszag draw up the budget for the incoming administration. He is currently the staff director of the House Appropriations Committee.

"Together, Peter and Rob will help steer our budget through Congress so that I can sign it into law," said Obama.

The two will have their work cut out. The federal government reported a record deficit of $237.2 billion in October, which reflected only a portion of the $700 billion Congress approved last month to rescue the financial markets.

Tuesday's nominations come a day after Obama revealed the most important members of his economic team. New York Federal Reserve President Timothy Geithner will succeed Paulson as treasury secretary, while former Clinton-era treasury head Larry Summers will be Obama's top economic adviser.

The president-elect said he would make additional appointments to his economic team in the coming days. An aide said Obama will hold yet another news conference Wednesday. He is expected to speak more about the economy.

With files from the Associated Press