Feb. 5 (Bloomberg) -- President George W. Bush sent Congress a record $2.9 trillion spending blueprint for the coming year that seeks billions in savings from Medicare and Medicaid, boosts defense spending 12 percent and projects a surplus in five years.

Bush's budget, his first to a Congress controlled by Democrats, reflects the priorities of his presidency: the war in Iraq and homeland security. It also lays out a menu of politically perilous cuts affecting the poor, the elderly and the disabled.

The budget for the year beginning Oct. 1 boils down to an opening offer to Congress in the haggling over how much money will be available for hundreds of programs. Democrats already are greeting the package skeptically. They likely will challenge Bush on several fronts, criticize omissions such as long-term costs for Iraq and rewrite the plan to suit their own priorities in a year leading into presidential elections.

``I doubt that Democrats will support this budget, and frankly, I will be surprised if Republicans rally around it either,'' Representative John Spratt, a South Carolina Democrat and chairman of the House Budget Committee, said in a statement.

Congressional hearings on the budget begin tomorrow.

The spending plan represents an increase of 4.2 percent from the current year. It projects that continued economic growth combined with spending cuts will erase the deficit and produce a $61 billion surplus by 2012.

``There is no rosy scenario estimates'' in the budget, administration spokesman Tony Fratto said today. ``We all feel comfortable in our projections.''

Deficit Projections

The deficit would drop to $244 billion in fiscal 2007 and $239 billion in 2008, the White House budget documents forecast The economy will grow 2.7 percent this year, the slowest rate since 2003, and 3 percent in the next, the documents say.

``There's no sign of a slowing economy right now,'' White House Budget Director Rob Portman said at a briefing.

The administration also proposed a one-year adjustment of the alternative minimum tax, at a cost of $48 billion, to prevent more middle class families from being captured by the levy. Leaving out a permanent resolution makes it easier for White House budget officials to show a balanced budget.

Bush's budget again calls for making permanent his 2001 and 2003 tax cuts. Doing so would force the government to forego $1.6 trillion in revenue between 2008 and 2017.

New Reporting Requirement

Brokerages would be required to report the purchase price of securities to help the government close the so-called tax gap, the estimated $290 billion in taxes that go unpaid every year. The change would help the Internal Revenue Service recover as much as $3 billion of the $11 billion in capital gains taxes that go uncollected each year due to fraud and error, according to the budget documents.

Bush proposed new tax reductions totaling $237.3 billion over the same period, including a permanent research tax credit for businesses, incentives to increase charitable giving, and expand untaxed investment accounts.

Senator Kent Conrad, the North Dakota Democrat who heads the Senate Budget committee, complained that Bush left out major expenses, including an accounting for total war costs and the cost of extending the alternative minimum tax beyond one year. Bush also assumes cuts in domestic programs without saying where they should come from beyond 2008, Conrad said.

``The president's budget is filled with debt and deception,'' the North Dakota Democrat said.

Defense Spending

The core Pentagon budget for fiscal 2008 -- about a fifth of federal spending -- would increase to $481 billion, a record. In addition, the president is seeking an extra $100 billion this year and $145 billion next year for the conflicts in Iraq and Afghanistan and the broader war against terrorism. The war spending includes money that flows through the State Department's budget.

Greg Valliere, chief political strategist at Stanford Washington Research, and other analysts say they doubt that Bush's defense request, which also includes about $6 billion for his plan to increase the number of troops in Iraq by 21,500, will face cuts in Congress.

``The Democrats want to show they've got just as much testosterone as the Republicans in that area,'' Valliere said.

Agencies Trimmed

Agencies outside defense and homeland security would get on average a 1 percent increase this year and in each of the next four. That effectively is a cut because it is less than the rate of inflation, which was 2.5 percent for 2006.

To meet his deficit goal, the president is looking to two of the government's three biggest entitlement programs.

Bush proposes curbing growth in Medicare spending by $66 billion over five years by raising premiums for higher-income beneficiaries, changing the way in which Medicare pays for some medical equipment and applying competitive bidding into the payment of clinical laboratory services. In Medicaid, Bush trims $12 billion over five years, mainly through changes in payments to drugmakers.

Bush is urging lawmakers to address projected shortfalls in Medicare, Medicaid and Social Security, known as entitlement programs because benefits are set by law. Outlays for all three would total $1.2 trillion in fiscal 2008.

The president says he wants to address Social Security before he leaves office in two years, including adding private accounts to the federal retirement insurance programs. That idea died for lack of support when he first pitched it two years ago. His budget is silent on private accounts and any impact on federal revenue isn't accounted for until 2012.

`Olive Branch'

The budget delays dealing with private accounts ``as an olive branch'' to opponents, Portman said at a briefing. ``As a practical matter, they probably would not be able to be implemented until 2012, so we delay them from 2010 to 2012.''

Once again, the administration proposed to eliminate or reduce 141 federal programs that are deemed ineffective, for a savings of $12 billion. As much as 75 percent of them have been proposed in the past, said Stephen McMillin, deputy director of the budget. Congress has either rejected them or not acted.

Bush, who inherited a surplus when he came into office, has been touting his blueprint for eliminating the deficit, which reached a record $413 billion in 2004.

``The budget deficit is declining and on a path to elimination,'' the president said in a message to Congress, part of the four volume, green and white covered budget documents. He told Democrats meeting at a retreat in Williamsburg, Virginia, on Feb. 3 that he understood the path to get there would be politically difficult.

``Some of you'll like it, some of you won't like it, but it achieves the goal that we have said, which is to balance the budget,'' Bush said. Democrats plan to offer their own balanced budget plan in March or April.

The deficit this year represents 1.8 percent of the gross domestic product, falling to 1.6 percent in 2008. The deficit was 6 percent of GDP in 1983.

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

Last Updated: February 5, 2007 16:14 EST