Bush budget sees bigger deficits as economy sags

By Caren Bohan and Jeremy Pelofsky

WASHINGTON (Reuters) - U.S. President George W. Bush forecast the U.S. budget deficit would more than double in 2008 and blamed a softer economy as he unveiled a $3.1 trillion spending plan for fiscal 2009 on Monday that would nearly freeze domestic programs.

The White House projections were immediately criticized by both Democratic and Republican lawmakers who said the numbers may gloss over the full extent of the fiscal deterioration and failed to include the full Iraq and Afghanistan war costs.

With the economy teetering on the brink of a recession, Bush said the deficit would reach $410 billion for the budget year 2008 that ends on September 30 and $407 billion for fiscal 2009 that begins on October 1.

The budget makes military spending and the Iraq war its centerpiece, proposing a 7.5 percent increase for the Pentagon to $515 billion.

On top of that Bush also sought another $70 billion for the conflicts in Iraq and Afghanistan but that money is only expected to cover those costs for part of 2009. The administration said it would ask for more Iraq money later.

"The budget protects America and encourages economic growth. Congress needs to pass it," Bush said after meeting with his Cabinet. The grimmer budget outlook will be inherited by the next president, who succeeds Bush in January 2009.

While the near-term deficits are a concern, many budget experts are bracing for much more serious fiscal problems in coming years as the baby boom generation's retirement causes spending on health care and other entitlements to explode.

The blueprint also assumes deep cuts in many popular domestic programs such as highway funds and heating assistance for the poor, in addition to wringing out billions in savings from the Medicare program for the elderly and disabled.

While many -- if not most -- of the priorities of the Bush budget will be jettisoned by the Democratic-led U.S. Congress, the unveiling of the document is sure to trigger a new round of sparring over Bush's fiscal policies and his economic legacy.

Democrats have hammered Bush for presiding over a shift to deficits after taking office amid budget surpluses, pointing to a jump in the national debt to $9 trillion from about $5.6 trillion when Bush took office in January 2001.

"Far from proposing a plan to fix the budget, the Bush administration proposes policies that worsen it, and with little compunction, leaves the consequences for the next administration and future generations," said House Budget Committee Chairman John Spratt, a South Carolina Democrat.

While some Republican legislators welcomed the budget, New Hampshire Sen. Judd Gregg, the senior Republican on the Senate Budget Committee, was scathing, saying it lacked credibility.

"This budget must have been viewed by them more as an academic exercise than a serious exercise because it's not a serious budget," Gregg told Reuters in an interview. "There are even more games than usual."

IRAQ WAR ADDS TO RED INK

Bush forecast deficits of over $400 billion in the next two years. That would be more than twice the size of the $162 billion gap of 2007 and approach the $413 billion all-time high for the deficit hit in 2004.