WASHINGTON  - Risking public anxiety over spending, President Barack Obama on Monday projected the budget deficit at a fresh record in 2010 as he battles double-digit unemployment before tightening finances in later years.

Criticized by Republicans as a tax-and-spend liberal, Obama is under pressure to convince investors like China he has a credible plan to control the U.S. deficit and debt over time.

We won't be able to bring down this deficit overnight, given that the recovery is still taking hold, Obama said after laying out $3.8 trillion in spending plans for the fiscal year to September 30, 2011.

We will continue, for example, to do what it takes to create jobs. That is reflected in my budget. It is essential, he said in a televised statement from the White House.

His blueprint now goes to a Congress deeply split on how to handle the twin woes of a massive deficit and high unemployment amid a still fragile emergence from recession. And lawmakers getting to work on the annual budget battle will be in no mood to anger voters ahead of congressional elections in November.

The budget forecast a $1.56 trillion deficit in 2010, or 10.6 percent of the economy measured by gross domestic product (GDP). This funding gap is up from a 9.9 percent share of GDP in 2009. But the shortfall was forecast to shrink to 8.3 percent of GDP in 2011, and to have halved from the level Obama inherited when he took office when his terms ends in January 2013, keeping a key pledge.

The deficit's rise in 2010 was partly due to the $787 billion stimulus package Obama pushed through Congress soon after taking office last year to fight the recession. Obama, a Democrat, pinned the financial mess firmly on his Republican predecessor President George W. Bush.


But Republicans seized on the grim fiscal forecast to criticize Obama's handling of the economy.

Senator Judd Gregg, the top Republican on the Senate Budget Committee, warned the country was sinking into a quagmire of debt and said Obama's stimulus plan had failed to create jobs.

These circumstances call for a bold, game-changing budget that will turn things around, put in place a plan to restrain spending, reduce the debt and tackle the big entitlement programs that are growing out-of-control, he said. Instead, the president has sent us more of the same.

While maintaining policies this year aimed at protecting a still fragile economic recovery, with $100 billion earmarked for measures to create jobs, Obama plans to save money from 2011 by curbing 120 projects, including a powerfully symbolic space mission to return to the moon, but will invest more in education and research.

Market reaction was muted and analysts surveyed the numbers with a healthy dose of skepticism.

I don't think there is anything out there that is job creating and I don't have much confidence that some of the spending cuts will actually happen, said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York.

Although Obama submits the budget to Congress, actual decisions about how the government raises and spends money are made on Capitol Hill in a process that usually lasts most of the year.

Polls show voters are worried by the weak condition of U.S. finances, and Obama plans to create a bipartisan fiscal commission to figure out options on taxes and spending.

Much of the improvement in the fiscal picture is driven by underlying forecasts adopted in the budget for solid economic growth, yielding higher tax revenue.

The economy is forecast to expand by 2.7 percent in 2010, but then pull at an above-average 3.8 percent in 2011 and rise above 4 percent for the following 3 years.

The budget also assumes unemployment will remain high, edging to 8.2 percent in 2012 from 10 percent this year, while inflation stays mild and interest rates rise only slightly.


Discontent over the jobless rate translated into political defeat for Obama's Democrats in an election last month for the U.S. Senate in Massachusetts, costing the Democrats a crucial Senate seat and foreshadowing potentially big losses for the party in the November congressional elections.

The budget plan reflects a struggle to bolster the economy and create jobs while tightening the government's belt to reduce the deficit. Those issues are concerns of voters who will elect all 435 members in the House of Representatives and more than a third of the 100 Senate members in November.

To boost jobs, Obama is setting aside $100 billion in 2010 in tax credits aimed at small businesses as well as investments in clean energy and infrastructure, before starting to tighten the country's fiscal belt the following year.

Economists say withdrawing policies aimed at boosting growth too soon helped prolong the Great Depression in the 1930s. Obama is determined to avoid repeating that mistake. But he must also ensure that investors don't lose confidence in the U.S. ability to put its fiscal house in order.

Democrats control both chambers in Congress. But with Republicans united in opposition to Obama's agenda, he still faces a struggle pulling together Democrats -- who badly need to show voters they are taking steps to reduce unemployment but at the same time face a voter backlash over aggressive spending measures taken to boost the economy.

In a sign of the difficulties Obama has already faced pushing through his domestic agenda in his first year in office, the budget dropped $646 billion in revenues from a cap-and-trade system to curb greenhouse gas emissions -- signaling pessimism that Congress will pass a climate bill with this provision.

(Additional reporting by Caren Bohan, editing by Frances Kerry)