The Bush administration's misguided policies are to blame for huge U.S. budget deficits, Treasury Secretary Timothy Geithner charged on Wednesday as he sought to build an election-year case for ending tax cuts for the wealthiest Americans.

With congressional elections looming in November, Geithner sought to regain the high ground on the issue of who bears responsibility for record budget gaps and to counter Republican labeling of Democrats as tax-and-spend, bailout-happy liberals.

Geithner said extending the Bush-era tax cuts for top income earners, as Republicans want, would force more borrowing to cover lost revenues and crimp more-effective remedies for boosting economic growth and hiring.

Borrowing to finance tax cuts for the top 2 percent would be a $700 billion fiscal mistake, Geithner said. It's not the prescription the economy needs now, and the country can't afford it.

With the economic recovery showing signs of slowing and unemployment at a lofty 9.5 percent, President Barack Obama's popularity has taken a heavy hit and Democrats on Capitol Hill are at risk of losing their majorities in the Senate and the House of Representatives.

The U.S. budget gap, which hit a record $1.41 trillion in fiscal 2009 and is poised to grow wider this year, has unnerved many Americans. A recent Kaiser Family Foundation poll found that 44 percent of registered voters rank the deficit as an extremely important issue in deciding how to vote.

HOT BUTTON POLITICS

The debate over the tax cuts, which are scheduled to expire at the end of this year, has grown hotter in recent weeks.

President Barack Obama and most Democrats want to extend the tax cuts only for individuals making less than $200,000, or families earning less than $250,000 -- about 97 percent of all Americans.

Republicans argue the recovery would be jeopardized if all the cuts are not extended, a concern some Democrats share.

We look forward to the debate about raising taxes in the middle of a recession, Senate Republican leader Mitch McConnell said on Tuesday.

Geithner argued that better use could be made of the money that would otherwise flow into the government's coffers. If people think there's a good case now for more stimulus for the economy, then we should have the debate about what's the best form of stimulus, he said.

Congress must take action to extend any part of the tax cuts. If the top rates expire, they would revert to 36 percent and 39.6 percent from 33 percent and 35 percent. Dividend tax rates would also rise from 15 percent to 40 percent with no action, a key source of stress among investors.

Another senior Treasury Department official said on Wednesday that the department is assuming Congress will let the tax cuts for the wealthiest Americans expire. The Treasury estimates doing so would reap an extra $37 billion a year and it already is setting its borrowing plans on the assumption that will happen.

FALSE PROSPERITY

Geithner, speaking to the liberal Center for American Progress and the right-leaning American Action Forum, harked back to the former Clinton administration's record of budget surpluses in the late 1990s, contrasting it with the succeeding Bush administration that he said ran up huge debts and caused Americans' incomes to stagnate with few jobs created.

We are living today with the damage that misguided policy caused, he said, adding that the country needed to choose a new course. Rather than recreating a false prosperity fueled by debt and passing the bills on to the next generation, we need to restore America to a pro-growth tax and fiscal policy.

Geithner has spent much of the year pushing for a broad overhaul of U.S. financial rules. With a regulatory revamp now signed into law, he has turned to bolstering the Obama administration's case for its policies.

Global investors are closely monitoring U.S. efforts to rein in budget deficits. The administration has said it is important to maintain near-term support for the economy but that a long-term plan to get deficits under control is needed.

Obama has charged a commission with coming up with a plan by December 1 to bring the U.S. budget into better balance.

(Reporting by Glenn Somerville and Kim Dixon, editing by Tim Ahmann and Paul Simao)

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