HARTFORD, Conn. (AP) — Connecticut is facing "an enormously challenging budget scenario" with deficits projected in the current budget and over the coming years, the state's budget director warned Thursday.

Despite efforts by Democratic Gov. Dannel P. Malloy to reduce the size of government and state employee retirement costs, Office of Policy and Management Secretary Benjamin Barnes said the lackluster national and regional economies, years of deferring Connecticut's long-term liabilities such as pension costs and a fast-growing demand for public services such as Medicaid health care coverage continue to delay the state's recovery from the Great Recession.

"This is — I will not shrink away from it — an enormously challenging budget scenario to be in," Barnes said.

On Thursday, he released the administration's annual fiscal accountability report to the General Assembly. It says the state's recovery from the recession has been and will continue to be slow, adversely affecting state revenue collections. The report also found that unemployment remains high and the state is vulnerable to outside forces such as the European debt crisis and the debate in Washington over how to address the so-called fiscal cliff in January when numerous spending cuts are set to kick in.

According to Barnes, the current $20 billion state budget, which ends June 30, has a shortfall of $365 million. The new budget for fiscal year 2014, which takes effect July 1, has a projected deficit of nearly $1.2 billion. That's about the same amount that expenditures are projected to exceed the state's constitutional cap on spending.

Malloy is expected to release a deficit-cutting plan for the current budget hole within weeks, which he said will not increase taxes. He's not scheduled to unveil his new two-year budget until February.

Malloy stressed that the deficit problem isn't as bad as it was two years ago, when he took office and faced $3.6 billion in red ink. But Barnes pointed out that he and Malloy likely won't have two important tools they used two years ago to help balance the books — labor concessions from state employees and tax increases. The deal with the state employee has already been inked, and Malloy said he "has no intention of raising taxes" to address next fiscal year's problems.

"So, we need to solve this problem through reduced spending," Barnes said.

An upbeat Malloy told his state agency heads that the state is better positioned to deal with the budget challenges than they were two years ago.

"Our state government, particularly the executive branch, is smaller, leaner and more cost-effective than it has ever been or been in at least recent times," he said. "We're going to continue that process, deliver a high level of service to our citizens and we're going to do it successfully."

House Minority Leader Lawrence Cafero Jr., R-Norwalk, accused Malloy of trying to sugarcoat the state's budget situation.

"I don't know how you look at a $365 million deficit when you, what, less than three months into a fiscal year; I don't know how you look at a $2.2 billion deficit for the next two years ... and say with a straight face that we're in a better position now than we were two years ago, especially knowing that you increased taxes by $1.8 billion," he said.

Cafero and other Republicans contend that Malloy and the Democratic-controlled legislature that passed the original budget failed to cut spending and relied on "phantom cuts" and savings to balance the books.

Malloy on Thursday insinuated that Cafero's criticisms were motivated by a possible interest in running for governor in 2014. Cafero said he hasn't announced any intentions to run for governor and said his commentary about facts provided by the administration is legitimate.