updated 10/14/2008 8:56:33 PM ET 2008-10-15T00:56:33

The federal budget deficit soared to $454.8 billion in 2008 as a housing collapse and efforts to combat the economic slowdown pushed the tide of government red ink to the highest level in history.

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The Bush administration said Tuesday the deficit for the budget year that ended Sept. 30 was more than double the $161.5 billion recorded in 2007.

It surpassed the previous record of $413 billion set in 2004. Economists predicted a far worse number next year as the costs of the government's rescue of the financial system and the economic hard times hit the nation's balance sheet.

Some analysts believe that next year's deficit could easily top $700 billion, giving the next president a formidable challenge.

Litany of economic woes
The administration blamed this year's record deficit on a litany of economic woes. The prolonged housing slump sharply reduced economic growth and has sent the unemployment rate rising, developments that reduce tax revenues.

"This year's budget results reflect the ongoing housing correction and the manifestation of that in strained capital markets and slower growth," Treasury Secretary Henry Paulson said in a statement accompanying the deficit report. "While it will take time to work through this period, we will overcome the current challenges facing our nation."

Democrats said the administration's economic policies were responsible for the growing deficit. They noted that when Bush took office in 2001, the budget was in surplus with projections that total surpluses over the next decade would reach $5.6 trillion. Those surpluses never materialized. The economy fell into a recession and then faced unexpected costs such as fighting wars in Afghanistan and Iraq and dealing with the aftermaths of Hurricane Katrina. Democrats also cite the costs of Bush's 2001 and 2003 tax cuts as further reasons for the budget imbalances.

"The eight years of this administration will include the five biggest budget deficits in history," said House Budget Committee Chairman John Spratt, D-S.C. "The resulting debt will be passed to our children and grandchildren."

Senate Budget Committee Chairman Kent Conrad, D-N.D., said the national debt had climbed by more than $1 trillion while Bush was in office and "the next president will inheriting a fiscal and economic mess of historic proportions."

Costs to increase significantly
The credit crisis that has swamped the financial system is boosting outlays because of the costs of protecting the depositors of failed banks.

Those costs will increase significantly in coming years. The government faces the prospects of paying for the $700 billion rescue plan that will boost spending as the government spends $250 billion in coming months to buy stock from banks to bolster their balance sheets and also buys up bad assets currently on banks' books.

Both of those programs are aimed at relieving strains on banks so they can resume more normal lending and ease a credit crisis that is threatening to push the country into a severe recession.

Many private economists believe the country will not be able to escape a recession even if the rescue program is successful at getting banks to resume lending.

The Bush administration is projecting that the deficit in the current budget year will rise to $482 billion, but that estimate made in the summer does not include the costs of the rescue program passed by Congress on Oct. 3.

The deficit for 2008 reflected the costs incurred in recent months for a $168 billion economic stimulus program that Congress passed at the beginning of this year in an effort to combat the economic slowdown. Those checks did give the economy a boost in the late spring and early summer. That impact has now faded leading many analysts to project that the current quarter and the first three months of next year will show declines in overall input.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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