July 15 (Bloomberg) -- The U.S. government's budget deficit will reach $455 billion in the fiscal year that ends Sept. 30, the largest in U.S. history, and widen to $475 billion the following year, the Bush administration said.

President George W. Bush's spokesman, Scott McClellan, blamed a lagging economy, lower tax receipts following stock price declines, and the war on terror for the shortfall. The administration expects to cut the deficit in half in coming years ``through economic growth and controlling spending,'' he said.

The new projections, reported on the White House Web site, mark a 50 percent increase over the $304 billion deficit the administration predicted six months ago. The previous record was a $290 billion deficit in 1992, when Bush's father was president. In February, the White House estimated the fiscal 2004 budget deficit would grow to $307 billion.

Democrats said tax cuts, job losses and higher spending after the Iraq war are responsible for the ballooning deficits, and sharpened their criticism of Bush and his Republican allies.

``They underestimate the size of the hole we're in,'' Senator Joseph Lieberman, a candidate for president, said in a statement. Democratic Senator Mark Dayton accused Bush of ``colossal financial mismanagement,'' and predicted next year's shortfall may be as high as $500 billion.

The Congressional Budget Office said June 10 it expected this year's deficit to reach $400 billion. Edward McKelvey, senior economist of Goldman Sachs Group Inc. in New York, last month raised his deficit forecast for fiscal 2004 to $475 billion from $450 billion.

`Hiding Behind' War

Democrats say Bush administration policies, such as the most recent $330 billion tax cut, are misguided.

``They are hiding behind the war and homeland security to excuse their own fiscal irresponsibility,'' Lieberman, of Connecticut, said.

Postwar operations in Iraq are costing $3.9 billion a month, according to Defense Secretary Donald Rumsfeld.

The government will spend about $47 billion on the Iraq war this fiscal year, the White House forecast said. In fiscal 2004, Iraq postwar costs will run to $20 billion, plus other ``expected but undetermined'' expenses, it said.

Dayton, of Minnesota, and other Senate Democrats pushed the administration to get help from other countries. ``Why are we doing it alone?'' said Senate Democratic Leader Tom Daschle.

Bush's tax cuts will boost the deficit by $13 billion in fiscal 2003 and by $36 billion in fiscal 2004, the report said.

Representative John Spratt of South Carolina, senior Democrat on the Budget Committee, said future generations will be saddled with Medicare and Social Security costs, and rising federal spending on defense and homeland security following the Sept. 11, 2001, terror attacks will crimp domestic programs.

`Moral Issue'

``This is not just a fiscal issue,'' Spratt told reporters yesterday. ``This is not just an economic issue. It's becoming a moral issue.''

``Both Democrats and Republicans are voting for big appropriations for defense because we're at war, but somewhere down the line this whole budget situation will come to bear,'' Spratt said.

McClellan said deficits grew because ``we had a recession, we had lower revenues and a war on terrorism.'' The deficit ``remains a concern but it is one that remains manageable,'' he said. ``We need to hold the line on spending'' to 4 percent.

`Growth Policies'

Bush, backed by Republican lawmakers has repeatedly said that his tax cuts will boost the U.S. economy and reduce deficits in the future. ``We can never get back to balancing the budget unless we have the growth policies we have been doing,'' said House Majority Leader Tom DeLay, of Texas.

Bush aides say that as a percentage of the nation's total output, the deficits now being projected are smaller than those of the 1980s. As a percentage of gross domestic product, the deficit would be 4.2 percent, McClellan told reporters. ``These deficits now are not hurting our economy, he said.

That percentage would be about the same as during the deficit- widening Reagan administration years, said Senator Max Baucus, the senior Democrat on the Finance Committee.

``Investors worldwide are wondering if we have our financial act together,'' said Baucus, of Montana. The deficit will cause ``interest rates to rise earlier than later,'' he said.

Still, a record deficit may not push interest rates higher right away, said Sung Won Sohn, chief economist of Wells Fargo & Co. in Minneapolis. ``It depends on what credit demand is in the rest of the country, and right now, demand for credit is soft, and there's plenty of supplies to satisfy demand,'' Sohn said.

``Deficits should not really pose a problem for interest rates'' now, Sohn said. ``It can be a problem two to four years down the road if private credit demand increases,'' he said.

The White House today forecasted deficits of $304 billion in fiscal 2005, $238 billion in 2006, $213 billion in fiscal 2007 and $226 billion in fiscal 2008.

Last Updated: July 15, 2003 14:08 EDT