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US deficit seen near record $490 bln in fiscal 2009

WASHINGTON - The Bush administration on Monday plans to project the U.S. budget deficit will soar to a new record of nearly half a trillion dollars in fiscal 2009 as the economic outlook darkens and Americans elect a new president.

The forecast will pose challenges to the next president who will take over in January, either Republican Sen. John McCain of Arizona or Democratic Sen. Barack Obama of Illinois, and likely further complicate efforts to balance the budget.

The White House is expected to boost its 2009 deficit forecast to about $482 billion in the fiscal year starting Oct. 1, 2008 while cutting the fiscal 2008 deficit projection to $389 billion, a source familiar with the report told Reuters.

U.S. President George W. Bush in February forecast the deficit would be $407 billion in 2009 and $410 billion in 2008. Still, the new report to be released on Monday projects a budget surplus of $60 billion in 2012, the source said.

"The fiscal year 2009 deficit will be nearly $490 billion due to the bipartisan economic stimulus bill and slowing economy," an administration official said on condition of not being further identified.

However, the official cautioned that "a lot can happen" between now and then.

The Democratic-controlled Congress and Bush approved a $168 billion, two-year economic stimulus plan that included tax rebates for millions of Americans and business tax breaks in an effort to ward off a recession.

The U.S. economy has been hobbled by the collapsing housing market and soaring food and energy prices. The government will report an initial estimate of second-quarter gross domestic product on Thursday and the July jobs figures on Friday.

White House spokeswoman Dana Perino declined to confirm or deny the new forecasts but said they had anticipated the budget deficit increasing as the stimulus checks were sent out.

"The best way to help reduce the deficit is to make sure you're keeping a lock on spending, but also that you can try to help grow the economy," she told reporters. "So we hope to pull out of this economic downturn over the next few months because of that stimulus package."

The budget has been sapped by the prolonged wars in Iraq and Afghanistan that came as Bush's tax cuts went into effect, and experts have been warning about an expected rise in health care spending as the baby boom generation's retirement looms and other entitlements are likely to expand.

Democrats have blasted the Republican-controlled White House for squandering budget surpluses and nearly doubling the national debt, from $5.6 trillion when Bush took office in 2001 to over $9.5 trillion now.

"Under its policies, the largest surpluses in history have been converted into the largest deficits in history," said House Budget Committee Chairman John Spratt, a South Carolina Democrat.

The U.S. Treasury also on Monday will unveil its debt issuance plans for the next quarter and is expected to increase sales of 10-year notes and 30-year bonds to help compensate for slowing revenues.

Merrill Lynch & Co Inc last week estimated that a 2009 deficit topping $500 billion, combined with the government's normal financing operations, would require the Treasury to sell about $1 trillion in debt next year, a task they called "daunting."