President Barack Obama will forecast a 2009 deficit of $1.75 trillion in a budget proposal on Thursday that sets goals of overhauling the healthcare system and shoring up the U.S. economy.

The huge deficit would represent 12.3 percent of U.S. gross domestic product -- the largest share since World War II.

Two senior administration officials, speaking on condition of anonymity ahead of the release of the 2010 budget at 11 a.m. EST, said Obama's expensive policy goals would be offset by cuts to put the country in better fiscal shape.

Federal spending is skyrocketing as officials try to jolt the faltering economy with public-works spending and tax cuts and bail out the troubled financial industry.

Obama, a Democrat, has pledged to halve the more-than $1 trillion deficit he inherited from former Republican President George W. Bush in four years. The budget lays out spending cuts in agriculture subsidies and other areas to meet that goal.

But spending would increase to meet key objectives. The budget sets aside $250 billion as a placeholder if Obama decides to ask Congress for more money to help the troubled U.S. financial system. No such decision has been made yet, officials said.

It also includes a 10-year, $634-billion reserve fund to help pay for the president's proposed healthcare reforms.

Another official said the budget included hundreds of billions of dollars in revenues, starting in 2012 and going over many years, from a greenhouse gas emissions trading system, one of Obama's key proposals to fight global warming.

Officials planned a high profile roll-out of the 134-page budget outline on Thursday. A more detailed version will come out in mid or late April.

The budget, for the fiscal year that begins on October 1, 2009, requires passage by Congress to take effect.

Obama's $1.75 trillion budget deficit forecast for this year reflects shortfalls accumulated under Bush as well as new spending proposals under the $787 economic stimulus package that the Democratic president recently signed.

His stimulus package and other efforts to revitalize the economy have done little to cheer Wall Street. U.S. stocks prices hit 12-year lows this week.

The United States has experienced 14 months of recession triggered by a financial crisis that has spread across the world. Obama says a big increase in government spending is crucial to avoid economic catastrophe.

A big challenge for Obama will be selling the budget to lawmakers, some of whom may resist cuts to such programs as farm subsidies that are popular in Congress.

There's no doubt that there are going to be things that we do that are going to create some political heartburn, one official said.

But our fundamental mission is restore the health of the economy, put the budget on a better (footing) moving forward.

RECORD BORROWING

The budget reflects the delicate balance Obama must strike between making sure there is enough money to fix the economy while avoiding excessive pressure on long-term finances.

Some experts fear that if the record pace of government borrowing to finance debt continues, it could affect financial markets by raising interest rates for borrowers, which would slow economic growth.

Obama will aim to bring the deficit down by 2013 to $533 billion, or 3 percent of GDP.

Tax increases on wealthier Americans and a troop drawdown from Iraq will curb the shortfall, the budget will say.

The budget projects costs of the Iraq and Afghanistan wars totaling just over $140 billion this year and $130 billion in the 2010 fiscal year. Annual costs will drop after that to $50 billion annually.

Washington spent about $190 billion on the wars in 2008. Obama looks likely to order U.S. combat troops to withdraw from Iraq over about 18 months, according to U.S. officials. At the same time, he is ramping up the U.S. military effort in Afghanistan.

Officials were eager to point out Obama's plans for cuts.

The budget would phase out government payments to crop producers making more than $500,000 -- saving $9.8 billion over 10 years -- and eliminate subsidies for cotton storage, saving an additional $570 million over the same period.

But the proposals do not lose sight of Obama's political and economic goals.

In a major address to Congress on Tuesday night, Obama signaled he has no intention of delaying his campaign promise of expanding healthcare to the 46 million people who are uninsured in the United States, a goal that may prove tough amid eye-popping deficits.

The United States spends more on healthcare than any other country, but its system is widely considered inefficient and it lags many other nations in key quality measures. Past efforts to make major healthcare changes have died in Congress.

Obama, who is eager to show he is mindful of the need to tackle the burgeoning deficits, held a Fiscal Responsibility Summit on Monday bringing together lawmakers and budget experts to discuss the long-term budget challenges.

In an open letter to Obama, experts at the Brookings Institution, the Washington think tank, warned that a soaring national debt would have consequences.

We will have to borrow money in domestic and international capital markets to finance this debt, and without a serious commitment to long-term fiscal restraint, lenders will eventually question the nation's fiscal credibility, they wrote.

(Additional reporting by Emily Kaiser in Washington and Leah Schnurr in New York, editing by Anthony Boadle)

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