UPDATE 3-US Congress budget office sees $1.8 trln deficit
* Sees FY09 deficit at highest ratio to GDP since 1940s
* GDP to shrink 3 pct in 2009, grow 2.9 pct in 2010
* White House says priorities unchanged despite forecasts
* Republicans argue projections demand less spending (Adds White House, congressional reaction)
By Jeremy Pelofsky
WASHINGTON, March 20 (Reuters) - U.S. congressional budget experts on Friday offered a darker economic and budget outlook, projecting a breathtaking $1.8 trillion deficit this year, which could complicate President Barack Obama's efforts to win passage of his $3.55 trillion budget for 2010.
The Congressional Budget Office's projected deficit for the 2009 fiscal year ending on Sept. 30 would amount to 13.1 percent of expected gross domestic product -- a level not seen since World War Two. In January, the budget office had forecast a $1.2 trillion deficit for fiscal 2009.
The CBO also forecast a deeper economic downturn this year, projecting a contraction of 3 percent in 2009 before the economy begins to recover in next year.
The budget experts at CBO forecast the deficit would ease to almost $1.4 trillion in fiscal 2010 -- or 9.6 percent of forecast GDP.
Since Obama took office in January, his administration has been shoveling out billions of dollars in a bid to reverse a steep downward spiral in the U.S. economy and prop up the struggling financial system.
"Although the economy is likely to continue to deteriorate for some time," the CBO said, the government's $787 billion economic stimulus package "and very aggressive actions by the Federal Reserve and the Treasury are projected to help end the recession in the fall of 2009."
The CBO projected that following its forecast steep economic contraction this year, the economy will grow 2.9 percent next year and 4 percent in 2011.
In January, CBO had forecast the economy to shrink 2.2 percent this year before growing 1.5 percent in 2010 and 4.2 percent in 2011.
The massive deficit forecasts come after Obama submitted in February his $3.55 trillion budget plan for fiscal 2010, which includes huge new programs to address health care and curb greenhouse gas emissions.
The White House predicted Obama's budget priorities would not be affected by the forecasts of bigger deficits.
"Even with those numbers, the four key principles of the Obama budget will be met," said White House budget director Peter Orszag, referring to investments in health care, education and clean energy as well as cutting the deficit in half by the end of Obama's first term.
CBO also revised its forecast for accumulating deficits over the next decade, saying they would total $9.3 trillion from 2010 to 2019. That drew immediate fire from Republicans who have criticized Obama's budget for its massive new spending plans and tax increases on the wealthy.
"It's as if you were on an airplane and the fuel light came on ... and the pilots kept flying on as if there's fuel for another hour," said Senator Judd Gregg, the top Republican on the Senate Budget Committee. "They're taking spending up so high ... you can't close the gap. It's a spending problem."
Obama's budget outline to Congress last month included a forecast of almost $7 trillion in deficits through 2019 -- or $2.3 trillion less than CBO's projection.
Democrats cautioned that Congress and the White House could not reverse the deficits quickly and that the forecasts were subject to wide swings because of the constantly shifting economy.
"Deficits of this enormity cannot be reversed in one or two budgets," said House Budget Committee Chairman John Spratt, who noted that huge tax cuts and enormous spending under the past Bush administration would "overhang the budget for years to come."
The CBO's forecast in January of almost $1.2 trillion in red ink for fiscal 2009 and $703 billion for fiscal 2010 came before Congress passed the economic stimulus package in February.
Obama's budget projected a $1.75 trillion deficit for fiscal 2009 and $1.17 trillion for 2010. The House and Senate Budget Committees were awaiting the latest CBO estimates before they would begin to craft their budget legislation next week.
The Democratic-controlled panels will face a delicate balancing act, trying to include as many of Obama's priorities as possible but at the same time not scaring off moderate or conservative Democrats who are crucial to passing the budget.
Already a group of fiscal conservative Democrats known as the Blue Dogs have demanded capping non-defense discretionary spending at inflation and that the health-care plan be deficit neutral, among other things.
"It is critically important, now more than ever, that the Congress and the administration develop a realistic plan for putting our country back on a path to fiscal responsibility," said Representative Charlie Melancon, a Blue Dog co-chair. (Additional reporting by Richard Cowan; editing by Leslie Adler)
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