US fiscal plan will double federal deficit

The US President George Bush has unveiled a fiscal plan that will see the US federal budget deficit double this year, with larger-than-planned deficits stretching well into his successor's term of office. US government borrowing this year and next will approach the previous all-time record deficit, of $413bn (£209bn) in 2004, Mr Bush warned.

However, the $3.1trn spending plan released will freeze or cut expenditure on many domestic policy programmes, with major increases planned only for the defence budget. The shortfall is a result of weaker tax revenues, the White House conceded, due to the extent of the coming US slowdown, which will be depressed even before Mr Bush's extension of his tax credits scheme is taken into account. Supporters of tax cuts say these reforms will promote enterprise and growth.

With the chances increasing of America sliding into recession under the weight of an intensifying housing slump, the sub-prime crisis and the credit crunch, Mr Bush said the federal deficit would reach $410bn for the budget year 2008 that ends on 30 September and $407bn for fiscal 2009.

The budget makes military spending and the Iraq war its focus, proposing a 7.5 per cent increase for the Pentagon. Military expenditure will top $515bn – plus $70bn more for the conflicts in Iraq and Afghanistan.

The proposals received a hostile reception from both sides on Capitol Hill.

The House Budget Committee chairman, John Spratt, a Democrat, said: "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."

The senior Republican on the Senate Budget Committee, the New Hampshire Senator Judd Gregg, declared: "This budget must have been viewed by them more as an academic exercise than a serious exercise because it's not a serious budget. There are even more games than usual."

The budget proposes significant cuts in highway funding, heating assistance for the poor and Medicare. However, given Democrat majorities in both houses, many of the priorities of the Bush budget will be jettisoned by Congress, leaving the important decisions on economic policy to the next president who will be elected in November and take the oath of office in January.

The Bush plan effectively makes up the shortfall in the private sector borrowing brought about by the tightening of credit criteria and the general weakening in growth. The White House claims it will still be possible to balance the budget by 2012 while making the tax cuts Mr Bush made in 2001 and 2003 permanent.