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*Deficit for FY2009 would represent 12.3 percent of GDP
*Obama vows to slash deficit to $533 billion by 2013
*Cost of Iraqi, Afghan wars seen at $140 billion in 2009

By Caren Bohan and Jeff Mason

WASHINGTON, Feb 26 (Reuters) – President Barack Obama will forecast the biggest U.S. deficit since World War Two in a budget that urges a costly overhaul of the healthcare system and would spend billions to arrest the economy’s freefall.

An eye-popping $1.75 trillion deficit for the 2009 fiscal year is projected in Obama’s first budget, according to U.S. officials who briefed reporters on the numbers.

That is equal to 12.3 percent of U.S. gross domestic product — the largest share since 1945 when the country ran a shortfall of 21.5 percent of GDP.

Obama will unveil the budget at 11 a.m. EST (1600 GMT). It provides the broad outlines of a more detailed document to be released in April.

The soaring deficit figure sent U.S. Treasury bond prices lower and yields up to three week highs on Thursday.

Gold prices slid to their lowest level in more than a week, after testing all time highs over $1,000 an ounce earlier this month. Spot gold fell to $941.20 an ounce, the lowest since February 17. Stock futures rose.

The budget, for the fiscal year that begins on Oct. 1, 2009, requires passage by Congress to take effect.

While Obama, a Democrat, has broad support with both chambers in Congress controlled by his party, he could face a fight as the sticker shock of huge deficits lead to wariness about more spending for goals such as the healthcare overhaul.


Federal spending is skyrocketing as officials try to jolt the recession-hit economy with public-works spending and tax cuts and bail out the troubled financial industry.

The deficit number reinforced concerns the government will need to sell record amounts of debt to pay for programs aimed at pulling the economy out of a deep recession.

“The budget issue is definitely one for Treasuries because it means greater funding going forward, it means that there is going to be a lot of supply that has to be taken on board by the market,” said Orlando Green, fixed income strategist at Calyon in London.

Obama, who took office on Jan. 20, has pledged to slash the deficit he inherited from former Republican President George W. Bush in coming years, bringing it down to $533 billion, or 3 percent of GDP by 2013.

Higher taxes on wealthier Americans and a planned drawdown of U.S. troops from Iraq are expected to help rein in the shortfall.

Obama’s budget proposal lays out spending cuts in agriculture subsidies and other areas to meet the deficit-reduction goal.

But spending would increase to meet key objectives.

The budget sets aside $250 billion as a “placeholder” if Obama decides to ask Congress for more money to help the ailing U.S. financial system. No such decision has been made yet, officials said.

The officials said that if the government were to spend $250 billion to inject money into the banking system, that would finance about $750 billion in asset purchases.

The plan also includes a 10-year, $634 billion reserve fund to help pay for the president’s proposed healthcare reforms.

The budget includes billions of dollars in revenues, starting in 2012 and going over many years, from a greenhouse gas emissions trading system, one of Obama’s key proposals to fight global warming.

Obama’s $1.75 trillion budget deficit forecast for this year reflects shortfalls accumulated under Bush as well as new spending proposals under the $787 billion economic stimulus package that the Democratic president signed earlier this month.

His stimulus package and other efforts to revitalize the economy have done little to cheer Wall Street. U.S. stocks prices hit 12-year lows this week.

The United States has experienced 14 months of recession triggered by a financial crisis that has spread across the world. Obama says a big increase in government spending is crucial to avoid economic catastrophe.

A big challenge for Obama will be selling the budget to lawmakers, some of whom may resist cuts to such programs as farm subsidies that are popular in Congress.

“There’s no doubt that there are going to be things that we do that are going to create some political heartburn,” one official said.

“But our fundamental mission is restore the health of the economy, put the budget on a better (footing) moving forward.”

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