Sept. 29 (Bloomberg) -- President George W. Bush is delivering two years early on his promise to cut the federal budget deficit below 2 percent of gross domestic product. The achievement may be short-lived because the deficit will widen again in the coming year.

The government ends fiscal 2006 tomorrow with a deficit estimated at $260 billion, just under 2 percent of GDP and down from the record $412 billion, or 3.6 percent, reached in 2004.

Next year, with government spending still on the increase while tax revenues slow along with economic growth, the deficit will increase to as much as $300 billion, according to Goldman Sachs Group Inc. in New York. It may top $400 billion again before Bush leaves office in January 2009.

``This is probably as good as it's going to get,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``There was a huge, mysterious tax windfall this year and spending hasn't gone down. It's gone up and it's getting worse.''

Tax receipts, which were running more than 10 percent ahead of last year for the entire first half of 2006, have since slowed, outpacing last year by about 8.6 percent according to the three-month moving average for the period ending Aug. 31. The non-partisan Congressional Budget Office foresees growth in tax revenue slowing to 4 percent for the next two fiscal years, while spending grows at a 5 percent rate.

``It is simply not likely that you're going to get tax receipts growing again at double-digit rates,'' said Douglas Holtz-Eakin, former CBO director and now a member of the Council on Foreign Relations in Washington.

Underestimating Spending

The CBO is probably underestimating spending growth, said Veronique de Rugy, an economist at the American Enterprise Institute in Washington.

``There have been two years of intense criticism on their spending and spending hasn't gone down, spending has gone up and it's getting worse,'' she said.

CBO says it's possible to keep the budget deficit about where it is now, based on the assumptions that current laws remain unchanged, government spending continues on its current trajectory and the economy grows at a 3 percent rate in each of the next two years. Even CBO says those assumptions are unrealistic.

For example, the CBO projection doesn't take into account the likelihood that Congress will extend temporary legislation that limits the application of the alternative minimum tax. That alone would cut $71 billion from the CBO's revenue estimates for the next two years, according to an analysis by UBS AG economists in New York.

Other Tax Items

If other expiring tax provisions are extended, as Bush has requested, that would reduce revenue by an additional $40 billion, UBS said.

The tax items alone would boost the CBO's projected deficit for fiscal 2008 to $384 billion, and that doesn't consider the possibility of slower-than-expected economic growth, or higher- than-forecast spending.

According to the CBO, each 0.1 percentage point decline in growth would cut revenue by $1 billion in fiscal 2007 and $4 billion in 2008. If GDP growth slowed to 2.5 percent over the next two years, that would lop $25 billion off collected taxes.

``That's just the tip of the iceberg,'' said Joe Minarik, director of research for the Committee for Economic Development in Washington. ``You'd see a reflection of that in the financial markets and in the ability to realize capital gains and for companies to give stock options.''

Economic growth fell to 2.6 percent in the second quarter, less than half the 5.6 percent rate of the first quarter, the Commerce Department said yesterday.

``What you'd expect is for tax revenue to grow more in line with the overall economy, and of course we have a slowdown in the economy,'' said Harris of Lehman Brothers.

While it's possible for the deficit to stay below 2 percent of GDP, said Minarik, ``if some of the forecasters are right, and we end up going into a recession, we're talking about double that and more.''

To contact the reporter on this story: Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net

Last Updated: September 29, 2006 00:07 EDT