By David Morgan and David Lawder

WASHINGTON (Reuters) - President Barack Obama's healthcare law will reduce the American workforce by the equivalent of 2 million full-time workers in 2017, the Congressional Budget Office said on Tuesday, prompting Republicans to paint the law as bad medicine for the U.S. economy.

In its latest U.S. fiscal outlook, the nonpartisan CBO said the health law would lead some workers, particularly those with lower incomes, to limit their hours to avoid losing federal subsidies that Obamacare provides to help pay for health insurance and other healthcare costs.

White House officials characterized reduced hours as a reflection of new choices for workers. CBO officials pointed to older workers as one example, saying some nearing retirement could decide to keep their work hours shorter to maintain healthcare subsidies until they qualified for Medicare.

But the report also referred to healthcare subsidies in less upbeat terms, saying assistance would "reduce incentives to work" and pose an "implicit tax on working" for those returning to a job with health insurance.

The biggest impact would begin in 2017, CBO said, because major provisions of the law, including an expansion of the Medicaid program for the poor in half of the 50 U.S. states, will be well under way by then. The CBO said there would be smaller declines in work hours that would occur before then.

Work hours would be reduced by the equivalent of 2.5 million jobs in 2024, said the agency, which earlier predicted 800,000 fewer full-time jobs by 2021. The bottom line would be a slower rate of growth for employment and compensation in the coming decade, according to the report.

POLITICAL TUSSLE

The link that the CBO drew between the health law and slower employment growth is likely to become fodder for partisan attacks in this year's congressional election battle, which will determine who controls Congress in the final years of the Obama presidency.

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Obamacare was unpopular with many voters before its botched October rollout. A month later, Obama weathered one of the biggest political blowbacks of his presidency as millions of people received notice that their health plans would be canceled because they did not meet the law's new standards.

Republicans, who have already made Obama's Patient Protection and Affordable Care Act (ACA) a top campaign issue for November, seized on the CBO report to press their argument that Obamacare is putting a damper on jobs growth and the economy.

"The president's healthcare law creates uncertainty for small businesses, hurts take-home pay, and makes it harder to invest in new workers. The middle class is getting squeezed in this economy, and this CBO report confirms that Obamacare is making it worse," House of Representatives Speaker John Boehner said in a statement.

But the CBO report undercut a Republican claim that so-called risk provisions that would compensate health insurers for unexpected losses amount to a bailout and should be repealed. The report said the provisions would actually net the federal government $8 billion over three years.

The White House pushed back on the argument that Obama's signature domestic policy achievement would mean an actual reduction in jobs.

"It's not that the businesses are cutting those jobs," said Jason Furman, who chairs the White House Council of Economic Advisers. He said the CBO report showed an impact on labor supply rather than demand for workers from employers.

The CBO report offered some bright spots on the broader fiscal front, saying the U.S. budget deficit would be a smaller than expected $514 billion in the fiscal 2014 year ended September 30. That is down from a previous estimate of $560 billion and a fiscal 2013 deficit of $680 billion.

But sluggish economic growth and stubbornly high unemployment would cause the improvement to be short-lived, it said.

Medicare, the huge government healthcare program for the elderly and disabled that has become a target for deficit hawks in recent years, will continue to grow at a slow rate 1.5 percent per beneficiary over the next decade. But as the U.S. population ages, overall Medicare spending will still top $1 trillion in 2024, versus $603 billion this year.

SIX MILLION ENROLLEES

The CBO said Obamacare would enroll 1 million fewer uninsured Americans than initially expected as a result of technical glitches that largely paralyzed the federal website HealthCare.gov in the first two months of open enrollment.

In a fresh forecast for 2014, the CBO estimated that 6 million people would sign up for private coverage through new health insurance marketplaces, down from an earlier forecast of 7 million. But the report predicted that the program would eventually overcome the deficit, signing up 24 million people by 2017.

The Obama administration says the health insurance marketplaces now operating in all 50 states and the District of Columbia have enrolled about 3 million people in private coverage so far, with volumes increasing following major fixes to HealthCare.gov.

Despite claims from Obamacare critics about the law's potential effects on hiring, CBO said the expected drop in work hours between 2017 and 2024 would result largely from worker decisions not to participate in the labor force, rather than from higher unemployment or the inability of part-time workers to find full-time hours.

"The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses' demand for labor," CBO said.

According to the report, federal subsidies can be substantial, particularly for lower-wage workers who receive more under the law's sliding income scale. But that also means the benefits can be phased out as a worker's income rises.

"The phaseout effectively raises people's marginal tax rates (the tax rates applying to their last dollar of income), thus discouraging work," CBO said.

But CBO Director Doug Elmendorf told reporters that the labor market would adjust in time.

"It is analogous in some ways to raising the minimum wage, and that effect will reduce the demand for labor in the short term," he said.

(Additional reporting by Roberta Rampton in Washington; editing by Caren Bohan and Matthew Lewis)