Gov. Neil Abercrombie signed into law Thursday a two-year, $21.9 billion state budget that increases spending to pay higher Medicaid, public worker health care and debt service costs but leaves him with the responsibility for making significant cuts to state programs.

State House and Senate lawmakers gave Abercrombie the discretion to reduce spending for programs by about $50 million in each of the next two years so he can begin to fulfill his campaign promise to restructure state government.

Abercrombie, in a statement, described the new budget as "a mission to change the direction of Hawaii." He also pointed out that lawmakers provided substantially less money than he requested.

"The budget passed by the Legislature requires our administration to operate with hundreds of millions less than we believed necessary to restore core government functions," the governor said. "Despite tax increases passed by the Legislature, services and programs will still have to be significantly cut."

In a June 16 memo, Abercrombie instructed state department directors to identify low-priority programs for possible elimination and take other belt-tightening steps to achieve savings.

Abercrombie acknowledged that departments have suffered severe cuts over the past few years, and he discouraged further across-the-board program restrictions.

Former Gov. Linda Lingle was criticized by majority Democrats in the Legislature for largely relying on across-the-board cuts to control spending and weather the recession, but whenever the Republican governor — or lawmakers — proposed outright program cuts, even for small programs, people who favored them resisted.

The Abercrombie administration has warned that vertical, rather than horizontal, cuts will likely be necessary, particularly if the state’s economic recovery does not create sufficient tax revenues to maintain existing programs.

"I have asked all departments to work together in a deliberate and thoughtful process that will identify programs that may be affected," the governor said. "In recent weeks our administration began discontinuing financial support of programs that are valuable but can no longer be sustained, such as Vanpool Hawaii and the State Pharmacy Assistance Program. These cuts and others that follow will be difficult, but the financial constraints we face allow for no other course of action."

The budget authorizes $11 billion in spending for fiscal year 2012 and $10.9 billion for fiscal year 2013, roughly a 7 percent increase from this fiscal year.

The general fund portion of the budget, over which the governor and lawmakers have the most control, is $5.4 billion in fiscal year 2012 and $5.5 billion in fiscal year 2013.

The financial blueprint anticipates about $180 million in labor savings from contract talks between the administration and public-sector labor unions — or about a 5 percent pay cut — and balances with the help of about $600 million in spending reductions and about $600 million in separate tax increases. The largest tax adjustment — lifting general excise tax exemptions on contractors, businesses that sublease, airlines and others — is expected to bring in nearly $400 million.

Abercrombie also signed into law a capital improvements project budget that includes $1.8 billion for fiscal year 2012 and $1 billion for fiscal year 2013.

Along with the budget and construction plan, Abercrombie signed a bill that adjusts retirement benefits for state and county workers hired starting in July 2012 to control costs in the Employees’ Retirement System, which is facing a $7 billion liability.

The new law will change employee and employer contribution rates, average compensation calculations, the vesting period to qualify for benefits and the retirement age.

"We are addressing the very same problem that many other states are struggling with," Kalbert Young, the state’s budget director, said in a statement. "It’s a problem which represents a growing burden on governments and taxpayers. This measure will help curtail and minimize the future growth in the overall pension liability. This action is the first phase in our overall strategy to tackle the underlying reasons for growth in the state’s long-term pension liabilities."