May 11 (Bloomberg) -- The government is piling up larger deficits than estimated in February as a recession in its 17th month reduces tax collections and raises the cost of stabilizing the economy more than forecast.

President Barack Obama’s administration, in the third and final installment of a budget rollout, today raised its estimate of the deficit this year to a record $1.84 trillion, up 5 percent from the February estimate, and to $1.26 trillion next year, up 7.4 percent. The administration also projected next year’s budget will end up at $3.59 trillion, compared with the $3.55 trillion it estimated previously.

The White House Office of Management and Budget said its revised estimate of tax collections from individuals and corporations is less than previously forecast and that the cost of bank bailouts and “economic stabilizers,” such as food stamps and unemployment benefits, is higher.

“The increase in the deficit is an extraordinary but necessary response to an inherited crisis,” the budget documents say. “It is also temporary.”

The deficit would be 12.9 percent of the economy, the largest since 1945, and would drop to 8.5 percent next year, the budget office said.

Growth, Unemployment

Economic growth, inflation and unemployment estimates were left unchanged from the budget outline the administration released in February. The budget office maintained its forecast for an economic recovery that will take hold in the second half of this year, gradually accelerate in 2010 and strengthen further in the next two years.

White House budget director Peter Orszag said the results of the $787 billion economic stimulus package enacted in February, combined with the Federal Reserve cutting the target interest rate for overnight loans between banks to a range of zero to 0.25 percent, will help propel the economy out of a recession.

“These policies are expected to stabilize the economy and stimulate a recovery by the end of 2009,” the administration said in its “Analytical Perspectives” volume. “The recovery is projected to gain momentum in 2010 and to strengthen further in 2011-2012.”

Tax Revenue

Orszag, writing on the OMB’s Web site, said that the Treasury Department estimates tax collections may be as much as $50 billion less this year and next year, compared with February.

The revised budget proposes to raise $58 billion over 10 years by increasing taxes on securities dealers, life insurers, and changing the tax rules of wealthy Americans with valuable estates. The increase is sought, Orszag said, because the plan to pay for a health-care overhaul limited some deductions for high-income households and now is projected to fall short.

The deficit estimate for this year brings the administration’s figures more in line with those of the Congressional Budget Office, which in March put the 2009 shortfall at $1.85 trillion. The CBO estimates the deficit for 2010 will be $1.38 trillion, higher than Obama’s figures indicate.

Senate Republican leader Mitch McConnell said the $89 billion increase in the deficit estimate this year would more than wipe out the projected $17 billion in savings Obama is seeking by eliminating or reducing 121 federal programs.

“Their projections for the deficit grew five times faster than the proposed cuts would save, and that’s assuming all the cuts are enacted,” McConnell, of Kentucky, said in a statement.

Economic Assumptions

The administration didn’t change its basic economic assumptions published in the budget outline Feb. 26, reflecting decisions made in January or early February.

The administration’s projection that the U.S. economy will expand at a 3.5 percent annual rate by year’s end is almost twice the 1.8 percent fourth-quarter growth estimate in the monthly Blue Chip Economic Indicators survey released May 10. It left unchanged its forecast that the economy would contract 1.2 percent for the full year and gain 3.2 percent in 2010.

It left the inflation forecast at minus 0.6 percent this year, increasing to 1.6 percent next year, and the jobless rate, forecast to average 8.1 percent this year, declining to a 7.9 percent average in 2010.

The Federal Reserve’s “novel” policies of extending funds to banks to boost liquidity and purchasing short- and long-term Treasuries also will help underpin the recovery, the White House said. Still, a doubling of the Fed’s balance sheet to about $2 trillion “holds the potential for an explosive increase in the nation’s money supply,” it said.

Unemployment at 8.9%

The U.S. unemployment rate surged to 8.9 percent in April, the highest level since 1983, already worse than the government’s estimate. “Economic developments since the forecast was made suggest that unemployment may peak at an even higher rate” on an average basis, the budget documents acknowledged.

Christina Romer, chairman of the White House Council of Economic Advisers, said in an interview on the Cable Satellite Public Affairs Network, or C-SPAN, yesterday that unemployment may rise to 9.5 percent this year.

The administration’s forecasts for unemployment are more optimistic than those made by the CBO in its March report, though a budget official said they were in line with Blue Chip forecasts.

To contact the reporter on this story: Roger Runningen in Washington at rrunningen@bloomberg.net

Last Updated: May 11, 2009 12:15 EDT