George Bush handed his successor a major fiscal headache yesterday as he delivered the last budget of his eight-year term, a finance bill that hikes military spending, blows out the deficit to near record levels and tops $3tn (£1.5tn) for the first time.

The 2009 budget provides for sharp spending increases on Iraq and protects controversial tax cuts, while freezing much domestic spending and cutting $200bn from healthcare over five years.

The centrepiece of the $3.1tn budget is a rise in military spending to its highest level in real terms since the second world war. "Two key principles guided the development of my budget," Bush said. "Keeping America safe and ensuring our continued prosperity."

The Pentagon's budget will jump by 7.5%, more than twice the rate of inflation, to $515bn. Bush also sought $70bn more for the conflicts in Iraq and Afghanistan. The projected funding represents an increase of 5%. Since coming to office, his administration will have increased baseline military spending - excluding extra spending on nuclear weapons - by 30%.

One of the few other winners in the budget is the diplomatic service, which will receive a 9% increase in funding to $690m. These spending increases coupled with Bush's recently announced $150bn-tax cut package will further reduce government receipts already hit by a sharp slowdown in the US economy.

Spending on the health and human services will fall by more than 2%, while the health resources and services administration, which helps the poor receive medical care, will have a 15.8% cut.

Despite such savings, the projected deficit will rise to near-record levels, reaching $410bn this year and $407bn in 2009. The record deficit, in 2004, was $413bn.

Bush's budget drew criticism from Democrats and some Republicans even before it was unveiled. With Congress controlled by the Democrats, many of the measures within are unlikely to be realised.

"Far from proposing a plan to fix the budget, the Bush administration proposes policies that worsen it, and with little compunction, leaves the consequences for the next administration and future generations," said the house budget committee chairman, John Spratt, a Democrat.

His Senate counterpart and fellow Democrat, Kent Conrad, said: "[Bush] proposes more of the same failed policies he has embraced throughout his time in office." The leading Republican on that committee, Judd Gregg, also criticised the package, saying the defence costs were "totally understated" and the proposed savings were exaggerated "because everybody knows the cuts aren't going to survive" Democratic opposition in Congress.

The budget projects all domestic spending beyond homeland security and defence be held to an average increase of less than 1%, an effective cut given the likely rate of inflation.