With two months still to go in the government's budget year, the federal deficit (search) has hit a record $395.8 billion.

The monthly accounting of spending and revenue showed that the July deficit totaled $69.2 billion, up 27.5 percent from the $54.2 billion shortfall in July 2003, the Treasury Department (search) said Wednesday.

The $395.8 billion deficit through the first 10 months of the government's fiscal year was up 22 percent from the same period a year earlier and now has passed the record deficit of $374.3 billion for all of last year.

The Bush administration is projecting that the deficit for all of the 2004 budget year, which ends Sept. 30, will be $445 billion. This year will mark the third consecutive budget deficit after four straight years of surpluses that reflected the economic boom of the 1990s.

Democratic presidential challenger John Kerry (search) is trying to make the flood of red ink a campaign issue againstPresident Bush (search). Kerry argues that the current administration turned projected record surpluses into record deficits to finance massive tax cuts primarily benefiting the rich.

The administration counters that Bush's tax cuts kept the 2001 recession from being worse and helped spur the current economic rebound.

The administration's revised forecast of a $445 billion deficit for the entire year, issued July 30, was reduced from the $521 billion budget gap it had estimated for 2004 in early February.

The Congressional Budget Office (search), citing stronger revenue growth than expected, has also revised its 2004 deficit forecast down to $422 billion, from the $477 billion deficit it estimated at the beginning of this year.

The new monthly report showed that through the first 10 months of the budget year, government revenues totaled $1.53 trillion, including $134.4 billion collected in July. The 10-month total represents 4 percent more than was collected during the same period in 2003.

During the last 10 months, the government has spent $1.93 trillion, including outlays of $203.6 billion in July. The 10-month total represents a 7.2 percent increase over spending in 2003.

While the deficit has already reached a record in dollar terms, administration officials contend that a better way to measure the deficit is as a percentage of the overall economy.

Their deficit estimate for the whole year would represent about 3.8 percent of the total economy, significantly smaller than the 6 percent of GDP hit by the record deficit run up when Ronald Reagan was president.

Both Bush and Kerry are pledging to cut the deficit in half over the next five years although each campaign has challenged the math being used by its opponent.

The Kerry campaign contends that Bush's figures do not add up because they don't take into account costs like making the tax cuts permanent while the Bush campaign argues that Kerry has proposed more new spending than he would save by repealing Bush's tax cuts for the top 2 percent of taxpayers.