The US budget deficit will hit a record high of $445bn(£244bn) this year, according to White House projections.
The war on terror is set to lead to a sharp rise in the budget deficit
It will rise from $375bn(£205bn) in 2003, the Bush administration forecast, citing the war on terror and economic downturn as contributory factors.
The forecast is, however, lower than a $521bn figure projected in February, an improvement the White House put down to better than expected tax receipts.
A leading Democrat said the forecast deficit was bad news for the country.
A deficit of $445bn would be the equivalent of 3.8% of total economic output.
The White House said it expected the deficit to narrow to $331bn(£181bn) in 2005, reducing in successive years until reaching a figure of $229bn by 2009.
The Office of Management and Budget said the rising deficit was due to an extraordinary succession of negative economic pressures including the 2000 economic downturn, the subsequent recession, the 9/11 attacks, the war on terror, increased spending on homeland security and a series of corporate scandals.
White House spokesman Scott McClellan said the administration's tax cutting agenda was continuing to strengthen the economy.
"We are meeting our national priorities and by showing spending restraint elsewhere in the budget we are on track to meet the president's commitment to cutting deficits in half over the next few years," he told reporters.
However, an aide to Democratic Presidential candidate John Kerry said the projected deficit underscored the decline in fiscal discipline under the Bush Presidency.
"Even worse than this record deficit is the record deterioration George Bush has caused for the long-term fiscal health of the country and his lack of any plan to restore financial discipline," said Gene Sperling, an economic advisor to Mr Kerry.
The OMB said $82bn more in revenues had been collected than expected in the period since February.
However, this was partly offset by $6bn in additional spending on state health programs Medicare and Medicaid. Estimated spending on Medicare alone is expected to total $67bn over the next five years, the OMB said.
Data also released on Friday showed a greater than expected slowdown in economic growth in the three months to June.
Record oil prices acted as one of the main brakes in the second quarter, boosting raw material and energy costs and acting as an unofficial tax.
The Commerce Department said the world's biggest economy grew at an 3% annual rate in the second quarter, down from 4.5% in the first.
Analysts had predicted a figure of closer to 3.6%. The dollar fell against most major currencies on the news.
Hands in pockets?
John Lonski, an economist at Moody's Investors Service, said that what really stood out for him was the "shockingly small increase" in shopping activity.
Consumer spending rose by 1% in the three month period, down from the surge of 4.1% in the previous quarter.
"This report shows that the second quarter was a soft patch for the US economy," said Alex Beuzelin, a strategist at Reusch International.
Inflation, meanwhile, rose to 3.3% in the period, underlining the fact that energy prices had jumped.
The core rate, which strips out volatile factors such as food and energy prices, increased at a more sedate 1.8%.
Price increases were given as one of the main reasons behind the US Federal Reserve's interest rate hike last month.
Analysts said that the weakness of consumer spending backs up the central bank's stated plan of increasing borrowing costs only slowly.
"The uncertainty on consumption will only reinforce a gradual rate hike path despite the high inflation reading", said Stephen Gallagher, an economist at Societe Generale.
With shoppers' pockets stretched, goods aren't flying off the shelves
Alan Greenspan, chairman of the Federal Reserve, said earlier this month that the US economy looked stable, despite an expected slowdown in the second quarter.
Mr Greenspan added that economic trends this year had been "quite favourable".
Friday's report did contain some positive news, with analysts pointing to a jump in corporate spending during the quarter as companies continued to build inventories.
Business fixed investment, as it is called, surged by an annual rate of 8.9% from 4.2%.
"The good news in the report is that we did have a strong rebound by real business investment spending, which bodes favourably for hiring activity," said Moody's Mr Lonski.
On top of that, a separate report by the Commerce Department showed that the recession in the US during 2001 was the shallowest ever.
There also has been evidence that economic conditions have improved since the end of June, with many observers predicting an even better end to the year.
A closely-watched survey of consumer confidence by the University of Michigan ticked higher in July, beating forecasts, Reuters reported on Friday.
The index rose to 96.7 in July from 95.6 in June, according to the news agency's sources who saw the subscription-only report. Economists had forecast a rise to 96.5.
"There was a modest improvement in consumer confidence and that bodes well for spending," said Rick Egelton, an economist at Bank of Montreal.