Bush predicts U.S. budget deficit will shrink

WASHINGTON (Reuters) - President George W. Bush predicted on Wednesday that strong tax receipts would cause the U.S. budget deficit to shrink to $205 billion this year, marking the third straight annual decline.

As he struggles with record-low approval ratings and criticism over the Iraq war, Bush was eager to tout what he viewed as a success for his domestic record and credited his tax cuts with reducing the budget gap.

But Democrats said the improvement in the annual deficit did not change the fact that Bush, who inherited a budget surplus when he came into office in 2001, has seen a sharp rise in accumulated debt on his watch.

The deficit hit an all-time high in 2004, in the middle of Bush's term, of $413 billion.

"A growing economy has led to growing tax revenues. Because people are making more money, they are also paying more taxes. The pie is growing," Bush told reporters at the White House.

But Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, accused Bush of having a "failed fiscal record."

"He has increased spending by nearly 50 percent since taking office, while at the same time repeatedly cutting taxes primarily on the wealthiest," Conrad said. "Debt has exploded on his watch -- rising from $5.8 trillion in 2001 to approximately $9 trillion by the end of this year."

The deficit forecast for fiscal year 2007, released in the administration's mid-year report on the budget, would mark an 18 percent decrease from last year's $248 billion.

The report revised the 2007 forecast downward from the $244 billion estimate given in Bush's budget proposal in February.

However, the new figure is still higher than many private forecasts, which expect a deficit of around $150 billion.

The White House report projected that the budget deficit would rise in 2008 to $258 billion but then decline again to reach surplus in 2012.

White House budget director Rob Portman said revenue growth will likely moderate in the future after jumping an estimated 7 percent this year and 37 percent in the past three years, as corporate profits are expected to be less robust. But he predicted the growth would continue to be healthy.

HEFTY SPENDING INCREASES

Robust tax collections this spring, bolstered by bigger paychecks for individuals and capital gains from a strong stock market, have brought down deficits, even as the Iraq war has contributed to hefty spending increases in recent years.

Although Bush contends his 2001 and 2003 tax cuts set the stage for a better fiscal picture by spurring economic growth, Democrats say the cuts were fiscally reckless.

House Majority Leader Rep. Steny Hoyer, a Maryland Democrat, said the 2007 deficit figure was nothing to boast about, given earlier White House predictions of surpluses.

"If you would look at their 2001 and 2002 projections they projected a $575 billion surplus. In other words they are three-quarters of a trillion dollars in error," Hoyer said.

As Bush released his budget estimate, a big battle looms between the White House and the Democratic-led Congress over domestic spending.

Democrats have sketched out a discretionary spending plan for fiscal year 2008, which starts on October 1, that exceeds by around $22 billion the $933 billion Bush has sought.

Bush vowed anew to use his veto to enforce that limit.

(Additional reporting by Richard Cowan and David Lawder)