Bush budget plan likely underestimates U.S. deficit

AMT TO BOOST RECEIPTS

The plan assumes that Bush's tax cuts enacted in 2001 and 2003 are made permanent, instead of expiring at the end of 2010.

However, it only a includes a one-year "patch" to keep the alternative minimum tax from ensnaring millions of additional middle-class taxpayers. Analysts said that -- coupled with the lack of war costs -- was a main reason why revenues and deficits looked to improve in fiscal 2010 and beyond.

Revenues lost from extending tax cuts would largely be offset by more revenues from the AMT, which was enacted in 1969 to ensure that the then super-rich paid at least some tax.

Much of what happens beyond this year will depend on the November election, but some see the budget proposal as a final expression of Bush's spending priorities. "He's teed up a policy document for a potential President (John) McCain," said Cato's Edwards, referring to the leading Republican candidate.

Still, some economists remain optimistic that the increase in the deficits will be a temporary phenomenon and may come in even smaller than forecast as economic stimulus measures and interest rates cuts spur the economy back to life.

"We're pretty sanguine that the government will be able to resume this trend of improving the deficit in the out-years," said Kim Rupert, head of fixed income analysis at Action Economics LLC in San Francisco. "They have overestimated the deficit by about $100 billion every year since fiscal 2005."

(Reporting by David Lawder; Editing by Neil Stempleman)