WASHINGTON (CNN) - The Congressional Budget Office Wednesday increased its forecast for U.S. government deficits to $199 billion this year and $145 billion in 2004, affirming a bleak fiscal outlook already fueling battles over taxes and spending in advance of the 2004 presidential election.

In August, the CBO anticipated a deficit of $145 billion in 2003 and $111 in 2004. In a report released Wednesday, the CBO also predicted the 10-year U.S. cumulative budget surplus will rise slightly to $1.3 trillion from the $1 trillion it last forecast.

As recently as 2001, the CBO predicted 10-year surpluses of more than $5.6 trillion. A CBO spokeswoman confirmed the contents of the report to CNN/Money Wednesday.

Democrats generally blame President Bush's $1.35 trillion tax cut package in 2001 for the steep slide in the U.S. fiscal position and say the $674 billion in new tax cuts he recently proposed will only dig the deficit hole deeper.

Republicans counter that tax cuts, coupled with strict government spending restraint, will help the sluggish economy grow and, ultimately, move the budget back toward balance.

Bush arrived in Michigan Wednesday to rally support for his domestic agenda, including his 10-year, $674 billion economic plan which has already prompted visible opposition from the Democrats.

During his State of the Union address Tuesday, Bush outlined his proposal, which includes speeding up income tax cuts already passed by Congress.

"This tax relief is for everyone who pays income taxes, and it will help our economy immediately," he said. "Ninety-two million Americans will keep this year an average of almost $1,100 more of their own money."

As he gave those statistics during his televised address, the camera showed House Minority Leader Nancy Pelosi, D-Calif., smile and burst into laughter, apparently unaware she was on camera.

Following the address, the Democrats criticized Bush's economic plan as too little, too late. "We think it's upside-down economics: It does too little to stimulate the economy now and it does too much to weaken our economic future," Washington Gov. Gary Locke said in the Democratic response.

"Today, the economy is limping along," Locke said. "Some say it's a recovery, but there is no recovery in our states and cities." The Democrats want immediate tax relief for middle class and working families, incentives for businesses to invest and create jobs in the short term, an extension of unemployment benefits and quick relief to cities and states.

"States and cities now face our worst budget crises since World War II," Locke said. "We're being forced to cut vital services from police to fire to health care -- and many are being forced to raise taxes."

Urging Congress to practice fiscal restraint in a time of growing deficits, Bush said he will send a budget to Capitol Hill that increases discretionary spending by 4 percent next year -- "about as much as the average family's income is expected to grow."

But the president, elected on a slogan of "compassionate conservatism," also proposed several new spending initiatives, including:

• $400 billion over the next decade to "reform and strengthen" Medicare, including providing a prescription drug benefit for seniors.
• $10 billion in new spending over the next five years to combat HIV/AIDS in Africa and the Caribbean, bringing total spending on that effort to $15 billion.
• $600 million in new money for drug treatment programs, which he said would help 300,000 more Americans over the next three years.
• $450 million to provide mentors to more than a million disadvantaged junior high school students and children of prisoners.
• Nearly $6 billion for Project Bioshield, a program to make vaccines available to combat bioterrorism agents such as anthrax, botulinum toxin, Ebola and bubonic plague.
• $1.2 billion in research funding to develop hydrogen-powered automobiles.