*Deficit for FY2009 would represent 12.3 percent of GDP
*2010 deficit would dip to $1.17 trillion
*Budget draws quick fire from Republicans
*Obama vows to slash deficit to $533 billion by 2013
By Caren Bohan and Jeff Mason
WASHINGTON, Feb 26 (Reuters) - President Barack Obama forecast the biggest U.S. deficit since World War Two in a budget on Thursday that urges a costly overhaul of the healthcare system and would spend billions to arrest the economy's freefall.
An eye-popping $1.75 trillion deficit for the 2009 fiscal year underlined the heavy blow the deep recession has dealt to the country's finances as Obama unveiled his first budget. That is the highest ever in dollar terms, and amounts to a 12.3 percent share of the economy -- the largest since 1945. In 2010, the deficit would dip to a still-huge $1.17 trillion, Obama predicted.
With that backdrop, his budget represents a gamble that Americans are ready for the sort of change they embraced by electing him in November -- a shift of wealth through higher taxes on the rich to pay for more government attention to healthcare, education, climate change and social programs.
The coming fight with Congress -- where the Republican opposition quickly opened fire on the plan -- will show whether Americans weary of paying for a raft of expensive bailouts for banks and the car industry can get on board with more hefty doses of big government.
Obama, a Democrat, promised to get the red ink under control even as he planned new spending priorities that veered sharply away from the policies of his Republican predecessor President George W. Bush.
"I don't think that we can continue on our current course. I work for the American people, and I'm determined to bring the change that the people voted for last November," said Obama, who took office on Jan. 20.
Republicans condemned the plan as showing a dedication to "tax-and-spend" policies, presaging major political fights getting the budget passed.
"I think we just ought to admit we're broke. We can't continue to pile debt on the backs of our kids and grandkids," said John Boehner, leader of the Republicans in the House of Representatives.[ID:nN26466344]
The cost of extra borrowing to pay for the record budget deficit pushed U.S. stocks and government debt prices down on Thursday. The budget's healthcare plans delivered a hit to shares in health insurers and drugmakers. [ID:nN26287108]
House Speaker Nancy Pelosi, a California Democrat, praised Obama's spending priorities and chided Republicans for what she saw as their new found interest in limited government.
"Perhaps ... they (the Republicans) have amnesia," Pelosi said, noting that with Bush at the helm they turned budget surpluses into deficits, in part through significantly higher government spending.
But some analysts questioned whether Obama's goals were realistic at a time when the economy is still in crisis and the surging deficits threaten to burden a future recovery.
"There are some good things in this budget but a lot still seems very wasteful. The market is crumbling around us and economies are in the tank," said Dan Cook, senior market analyst with IG Markets in Chicago.
Obama sought to push ahead with a campaign promise of expanding healthcare to the 46 million people who are uninsured in the United States. His budget includes a 10-year, $634 billion reserve fund to help pay for the president's proposed healthcare reforms -- much of it paid for by raising taxes on those earning more than $250,000 a year.
The budget also raises the possibility of more than doubling the government's aid to the battered financial sector.
The administration put in a "placeholder" to buy as much as $750 billion of assets from financial firms, which have been nearly crippled by an overhang of bad mortgage debt. Assuming one-third is lost, the ultimate cost to taxpayers would be $250 billion, the budget said.
Obama has not decided whether to seek that money, but if he does, it would come on top of an existing $700 billion financial bailout program, which has been unpopular with many Americans who see it as rewarding Wall Street bankers who made risky bets on mortgages securities. [ID:nN26313060]
The proposed $3.55 trillion spending blueprint for the 2010 fiscal year that begins Oct. 1 provides the broad outlines of a more detailed one to be released in April.
While Obama has broad support since Congress is controlled by Democrats, he could face a fight -- including among fiscal conservatives in his own party -- about spending goals.
The deficit figure reinforced concerns the government will need to sell record amounts of debt to pay for programs aimed at pulling the economy out of a deep recession.
Obama set a goal of slashing the deficit to $533 billion, or 3 percent of GDP by 2013. A rollback of the Bush tax cuts for wealthy Americans and a planned drawdown of U.S. troops from Iraq are expected to help rein in the shortfall.
Obama is seeking an additional $75.5 billion for wars in Iraq and Afghanistan for the rest of the current fiscal year. He is requesting $130 billion for military operations in the two wars for 2010, which would be down from the roughly $140 billion he expects will be needed this year. [ID:nN26546903]
Washington spent about $190 billion on the wars in 2008. Obama looks likely to order U.S. combat troops to withdraw from Iraq over about 18 months, according to U.S. officials. At the same time, he is ramping up the military effort in Afghanistan.
Obama's budget proposal lays out spending cuts in farm subsidies and other areas to meet the deficit-reduction goal. [ID:nN262396]. But such programs are popular with lawmakers -- both Republicans and Democrats --from states with big agricultural sectors who may be loath to allow cuts.
The budget includes billions in revenues, starting in 2012, from a greenhouse gas emissions trading system. That is central to Obama's proposals to fight global warming, which are a major departure from the policies of Bush, who was widely criticized by environmentalists for resisting action. [ID:nN26546903]
The $85-billion U.S. college student loan business reeled from a budget proposal to axe the giant federally guaranteed student loan program. In a major shift that severely undercut shares in top student lender Sallie Mae SLM.N, the budget called for moving most student lending into the direct-loan program run by the U.S. Education Department.[ID:nN26263008]
The $1.75 trillion budget deficit forecast for this year reflects shortfalls accumulated under Bush as well as new spending proposals under the $787 billion economic stimulus package Obama signed earlier this month.
While Obama is still basking in high approval ratings from the U.S. public, his stimulus package and other efforts to revitalize the economy have done little to win over Wall Street. U.S. stocks prices hit 12-year lows this week.
Additional reporting by Thomas Ferraro, Jeremy Pelofsky and Emily Kaiser in Washington and Leah Schnurr in New York, editing by Frances Kerry