Well considering that under Clinton and a Republican house, we were able to cut the deficit in a meaningful way, have higher taxes than we do now, have a budget surplus, and a massive economical expansion I see no problem with doing what Obama wants to now, and that is to phase out certain tax credits and close up loopholes. How will that hurt jobs or demand? I'll give you a great example of how it wouldn't. We used to have a $2000-3000 hybrid tax credit that got phased out, where were you when that went away? Well Toyota still has a hard time keeping up with the demand for Prius, so much so that the end of this year they begin building the Prius and hybrid Camry in Mississippi. Imagine that!
Anyways do that, phase out the bush tax cuts for the rich and once the unemployment is down to 5% and the dollar is up again phase them out for the middle class as well.
In the meantime besides phasing out tax credits and closing loopholes, each part of the government from the military to social services needs to be thoroughly examined, kept just as efficient (If not more) by finding better contracts with private companies (ie military contracts) and other areas. Perfect example is the IRS is saving quite a bit of money as their systems become more computerized, and they are far more efficient than ever before. As long as all services the government provides to its people stay just as good if not better, then cut away.