Obama predicts £1.2TRILLION deficit this year - the biggest since World War Two

By David Gardner for MailOnline
Updated: 19:52 EST, 26 February 2009

America is set to run up its biggest national debt since the Second World War in a bid to halt the nation's economic freefall, President Obama has warned.

Presenting a revised budget at the White House, the President predicted a deficit of £1.2trillion.

That is equal to 12.3 per cent of America's entire gross domestic product - the largest since 1945 when the U.S. ran up a shortfall of 21.5 per cent.

Barack Obama presents his revised budget predicting a deficit of £1.2trillion

However, Mr Obama aims to have reduced the deficit to £800billion by next year.

He said: 'While we must add to our deficits in the short term to provide immediate relief to families and get our economy moving, it is only by restoring financial discipline that we can produce sustained growth and shared prosperity.

'We will have to compromise on things we care about but can't afford right now.'

But he insisted the government cash infusion was necessary to stave off economic 'catastrophe'.

The revised budget includes plans to offset extra spending by raising taxes for the country's richest 2 per cent and slashing spending in Iraq, which currently costs £7billion a month.

Time to rebuild: President Barack Obama arrives to speak about his fiscal 2010 federal budget

Federal employees will see pay rises capped at 2 per cent and military personnel will get 2.9 per cent.

Mr Obama said the budget would be a proper account of government spending, adding: 'This budget is an honest accounting of where we are and where we intend to go.'

He said previous budgets had 'not told the whole truth' about spending and that 'large sums have been left off the books'.

'And that kind of dishonest accounting is not how you run your family budgets at home; it's not how your government should run its budgets either,' the President declared.

The Democratic administration claims the £97billion cost of the wars in Iraq and Afghanistan estimated for this year will fall dramatically after planned troop withdrawals within 16 months.

A New Era of Responsibility: Copies of U.S. President Barack Obama's new budget outline at the Government Printing Office in Washington, DC

But critics say the administration's plan to switch troops and resources to battle rebels in Afghanistan could eat up much of the savings.

The budget includes a ten-year, £442billion fund to help pay for ambitious plans to ensure health coverage for more than 48million Americans currently without insurance.

It also sets aside an additional £523billion to help shore up Wall Street banks. This cash reserve is in addition to two bail-out plans in the past three months.

The Republicans attacked the figures. 'I have serious concerns with this budget, which demands hardworking American families turn over more of their money to the government to pay for unprecedented spending increases,' Senate Republican leader Mitch McConnell said.