The White House will project that the budget deficit will peak this year at US$521 billion, shattering previous records and setting up an election-year battle over U.S. President Bush's tax and spending priorities, people familiar with the budget said on Thursday.

U.S. President George W. Bush speaks at the U.S. Conference of Mayors in Washington, January 23, 2004. The White House said on Friday it has no plans 'at this point' to seek more money this year for military operations in Iraq, putting off any politically sensitive request until Congress convenes in 2005 after the U.S. presidential election. [Reuters]

The White House sees improvement in federal red ink after that, reflecting the president's election-year goal of halving the deficit over the next five years, though many budget analysts and lawmakers doubt that can be achieved.

In the fiscal 2005 budget he will send to Congress on Monday, Bush will also estimate the 10-year price tag of the newly enacted Medicare prescription drug plan at US$539 billion -- far more than initial projections of US$400 billion.

Officials said the gap stemmed from long-standing differences in assumptions the White House and Congress make about the program, particularly how many people will choose to participate and how much it will help to reduce drug costs.

Democratic Sen. Edward Kennedy of Massachusetts said the administration would boost "profits for drug companies" but do "nothing to reduce the exorbitant prices that drug companies charge."

At US$521 billion, the fiscal 2004 deficit would easily top the record US$374 billion shortfall posted in fiscal 2003.

It is also significantly higher than this week's Congressional Budget Office deficit projection of US$477 billion for fiscal 2004.

Bush's Democratic presidential challengers blame the deficit on his sweeping tax cuts.

Bush points to the economic downturn and the costs of the war on terror following the Sept. 11, 2001, attacks. He has asked Congress to make his tax cuts permanent, arguing they will help reduce the deficit over time by growing the economy.

But even fiscal conservatives are skeptical Bush will be able to meet his goal of cutting the deficit in half by 2009.

They say White House projections do not factor in the high cost of keeping U.S. troops in Iraq, and warn that the prescription drug plan would only add to the red ink.

By signing the Medicare bill into law, Bush reached out to seniors, an important voting bloc in swing states like Florida.

REACHING OUT TO CONSERVATIVES

Faced with a backlash from conservatives in his own party, Bush's budget will call for limiting growth in spending outside defense and homeland security at about 0.5 percent -- far less than the rate of inflation.

Bush's plan could face stiff opposition from Republicans and Democrats alike.

Republican lawmakers, who will oversee the spending process, warned on Thursday the plan could mean painful cuts in programs ranging from veterans' health to medical research.

In briefing papers, the Republican "appropriators" who actually divvy up federal funds each year noted even a complete freeze in the spending targeted by Bush would cut the deficit by only a "minimal" US$3 billion.

While a record in dollar terms, a US$521 billion shortfall would still be less than levels seen in the early 1980s when viewed as a percentage of the size of the U.S. economy.

Some analysts have even suggested the administration may be overstating the size of the deficit in order to make it easier to show improvement before the November election.

Administration officials say they use conservative estimates and attribute the discrepancy with the congressional budget analysts to technical factors.

One may be economic growth.

The Congressional Budget Office projected growth of 4.8 percent this year and 4.2 percent in 2005.

White House economists are optimistic about the economy but slightly more conservative. They expect growth in 2004 of roughly 4.6 percent -- in line with a poll of private economists in the closely watched Blue Chip survey -- followed by growth of above 4 percent in 2005.

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