Rising budget deficit may add to Republican woes

By Caren Bohan and Richard Cowan

WASHINGTON (Reuters) - U.S. President George W. Bush hopes a $150 billion economic stimulus package will avert a recession in his final year in office but he also faces another problem: worsening budget deficits.

Democrats have long criticized Bush as fiscally reckless for presiding over a shift from budget surpluses in 2001 to deficits that hit a high of $413 billion in 2004.

For the past three years, however, Bush has trumpeted declines in the annual deficit.

The improvement may have come to an end for now.

A White House official said the budget that Bush will lay out on Monday will include budget deficit forecasts in the range of $400 billion in fiscal 2008 and 2009. That is equivalent to around 2.8 percent gross domestic product.

Those projections are in line with the expectations of many private analysts who say weaker corporate profits and slower growth in Americans' incomes amid a cooling economy will push the deficits higher.

"I would expect the administration's budget to reflect that the economy will grow at a slower pace than it has in the previous few years and that reduces revenues," said Brian Riedl, a budget expert at the Heritage Foundation think tank.

The budget outlook is likely to be gloomier than in recent years, whether or not the economy slips into recession or merely suffers a period of lackluster growth.

A higher budget shortfall could fuel Democratic criticisms and might pose problems for the Republican Party in the November 4 election to pick a successor to Bush.

The budget deficits on Bush's watch have not only been a source of Democratic criticism, but they have also caused unease among some of the president's Republican allies.

Some Republicans who have faulted Bush for failing to take a tough enough approach to spending in his first several years in office believe the president's fiscal record contributed to the Democratic takeover of Congress in the 2006 elections.

In a quote that helped fuel perceptions that the administration was not committed to taming budget shortfalls, former U.S. Treasury Secretary Paul O'Neill has said that Vice President Dick Cheney once told him that "deficits don't matter."

While avoiding direct criticism of Bush's policies, Republican presidential candidate John McCain has distanced himself from Bush's approach on the budget. The Arizona senator voted against Bush's 2001 and 2003 tax cuts, although he now says he would support extending them. McCain has also made cutting wasteful government spending a mantra of his campaign.

Bush, too, has taken up the cause of spending restraint lately. In his State of the Union address on Monday, he unveiled a new effort to crack down on special-project spending items that lawmakers add to budget bills.

Democrats have countered that Bush did little to curb such special-project spending when Republicans held control of Congress. Democrats also point to controls they've already put in place to make those spending measures more transparent.