July 28 (Bloomberg) -- The U.S. budget deficit will widen to a record $482 billion next year, the Bush administration projected, constraining the next president's ability to cut taxes or increase spending.

The projected deficit for the fiscal year that begins Oct. 1 is higher than the $407 billion forecast by President George W. Bush in February. The bigger shortfall reflects dwindling tax receipts because of the U.S. economic slowdown, the cost of a $168 billion economic stimulus package and spending on the wars in Iraq and Afghanistan.

``We've already seen a pretty sharp cooling in tax receipts and it's just going to continue into next fiscal year,'' Stephen Stanley, chief economist at RBS Capital Markets, said in a telephone interview.

The deficit projection will burden either Republican John McCain or Democrat Barack Obama, the presumptive presidential nominees of the major political parties, with a constricted budget that has little room to support their domestic policy proposals. The next president also will inherit the deepest housing recession in a generation, fears of a crisis in the banking industry, a falling dollar and high energy prices.

McCain has promised corporate and individual tax cuts along with spending to promote U.S. energy independence. Obama is vowing to enact a plan for universal health care, middle-class tax cuts and proposes spending on education and job training.

Setting Priorities

Instead, both may be forced to put some campaign promises on hold to reinvigorate the economy and drive down the deficit while also grappling with leftover foreign policy problems such as the wars and the nuclear ambitions of Iran and North Korea.

Jason Furman, Obama's top economic policy adviser, said in a statement that the projections are ``an urgent reminder'' that U.S. economic policy needs to be changed.

``These have been years of unprecedented fiscal irresponsibility,'' Furman said.

McCain called the figures ``another reminder of the dire fiscal condition of the federal government'' and a ``sad legacy for the American taxpayer.''

``There is no more striking reminder of the need to reverse the profligate spending that has characterized this administration's fiscal policy,'' he said in a statement.

The administration's mid-year review projects the deficit for fiscal 2008 will hit $389 billion, $21 billion less than the forecast released in February.

`Not Happy'

White House Budget Director Jim Nussle said the administration is ``not happy about the deficit,'' which is higher than the average of the last 40 years.

``Certainly there are a number of pressures out there'' that could add to the deficit, he said in a briefing.

Nussle, in a Bloomberg Television interview today, said the deficit ``got wider as a result of the bipartisan stimulus.''

The White House also lowered its forecast for U.S. economic growth this year and next. The budget office said the gross domestic product is being reduced to a 1.6 percent rise this year, compared with a 2.7 percent increase estimated five months ago. Next year, the economy may expand 2.2 percent, instead of the 3 percent increase projected in February.

Government revenue will be $49 billion less next year compared with the level projected in February, because the economy has worsened, the review said.

Illustrating the political stakes, Nussle warned congressional Democrats not to increase spending.

`Bust Through'

``It already appears that congressional Democrats are lining up to bust through the president's budget, and for that matter, bust through their own budget,'' he said at the briefing.

``We can manage the deficit in the long term if you keep spending under control'' and a growing economy can again produce surpluses in about five years, Nussle said during the interview.

House Speaker Nancy Pelosi, a California Democrat, accused Bush of having ``mortgaged our future'' by pursuing the wrong priorities.

``An unnecessary and extraordinarily costly war in Iraq has turned record surpluses into record deficits,'' she said in a statement. ``Meanwhile, our economy is in a severe economic slump as a result of this president's mismanagement.''

Treasuries rose as the forecast for a higher budget deficit and a rise in European bond prices led to increased speculation the U.S. economy will slow amid decreasing global growth.

The deficit is one of the ``underlying themes that people are nervous about. It's just more bad news, and that leads to more buying of Treasuries,'' said Charles Comiskey, co-head of U.S. Treasury trading in New York at HSBC Securities USA Inc.

A Deterioration

The shortfall reflects a deterioration of the budget over the past seven years. Bush inherited a budget surplus of $128 billion when he took office in 2001. The budget worsened almost immediately, because of recession, the Sept. 11 attacks, the cost of Bush's tax cuts, the beginning of the war in Afghanistan and, later, the war in Iraq that began in March 2003.

Bush recorded his first deficit a year after being sworn in, and it grew to $413 billion in 2004. The administration in February forecast the deficit will narrow to $160 billion deficit in 2010, $96 billion in 2011 before returning to surplus in 2012.

The Next President

The current projections may understate the deficit next year because the administration hasn't requested money to prosecute the wars for the full year, leaving that to the next president. Military operations in Iraq and Afghanistan now cost about $10 billion to $12 billion a month.

The Bush administration and Congress also haven't dealt with the largest long-term fiscal problems: the growing costs of Medicare, Medicaid and Social Security. Those three programs consumed an estimated 41 percent of the federal budget in 2007.

Obama is meeting today with his top economic advisers on ``pressing economic challenges,'' his campaign said. The Illinois senator was to meet with business and labor officials on oil, food and other commodities, topped with discussions with investor Warren Buffett, former Chairman of the Federal Reserve Paul Volcker and former Treasury Secretary Robert Rubin, among others.

McCain, an Arizona senator, was scheduled to talk about the economy at town-hall meetings in Nevada and Wisconsin.

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

Last Updated: July 28, 2008 17:30 EDT