Rising budget deficit may add to Republican woes

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.

In addition to the slower growth, the $150 billion price tag for the stimulus package of tax rebates and other measures will add to this year's budget deficit.

Bush's funding request for the Iraq and Afghanistan wars for 2008 totals $193 billion and is another source of upward pressure on the deficit.

While most of Bush's Republican allies in Congress have supported the stimulus package that the administration hammered out with leaders in the House of Representatives, some have expressed wariness about its effect on the deficit.

Sen. Judd Gregg, the New Hampshire conservative and senior Republican on the Senate Budget Committee, said the stimulus legislation would "aggravate" the deficit and he voiced doubts about its effectiveness.

Gregg acknowledged a near-term worsening in the budget picture was likely, though he said the bigger fiscal worry was the future cost of entitlement spending.

"Any adjustment in the deficit is going to be a reflection of the economic activity and the slowdown that we're probably heading into," Gregg said. "Of course if we're heading into something more severe than a slowdown we're going to see a very significant adjustment."

(Editing by David Wiessler)