The state and city are teetering on the edge of a financial precipice, and while Governor Paterson’s budget increased state spending by 5.6% this year, Mayor Bloomberg is providing a dramatic contrast, holding the line on city spending.

Mr. Bloomberg is calling for more than $1.3 billion in budget cuts, and offered a grim economic forecast during his executive budget presentation yesterday at City Hall.

He said steep losses at Wall Street firms, an anticipated loss of some 90,000 jobs in the city’s private sector, and a drop in commercial real estate transactions are cause for concern. City revenues are projected to decline for the first time since 2002.

“The numbers are scary,” Mr. Bloomberg said. “Make no mistake about it,” he added, “everybody in this city should pray Wall Street does well.”

Mr. Paterson is projecting a $5 billion budget gap in the next fiscal year, and yesterday called for the state to “immediately begin taking steps to rein in government spending.”

“While this year’s budget is balanced, we face some very significant challenges ahead to get our fiscal house in order,” Mr. Paterson said in a statement. The state is anticipating a $7.7 billion deficit in fiscal year 2010 and an $8.8 billion deficit in fiscal year 2011.

State lawmakers reached a $121.7 billion budget deal earlier this month that increased state-financed spending by 5.6% and included $1.5 billion in new taxes and fees. He has said the state needs to do “hard-core cutting” and trim between 5% and 10% of the budget.

Mr. Bloomberg said yesterday that spending in the city would remain almost completely flat, which hasn’t happened in more than a decade.

His $59.1 billion budget includes a $400 property tax rebate for homeowners and a one-year extension of a 7% property tax cut. It also calls for the city to fulfill four years of its capital program goals over five years, for a savings of 20% of the budget annually. The longer time frame will mean that the capital program should cost $55.7 billion over the next four years.

The city’s revenue projections have improved since the mayor first released his budget in January, an increase Mr. Bloomberg attributes to firms paying more in taxes than they actually owe to avoid facing a steep penalty for filing too little. The city is projecting that it will receive $2 billion more in revenues than it had projected in January.

The unexpected boost is helping the city cushion the financial blow it’s been bracing for, but Mr. Bloomberg cautioned yesterday that businesses wouldn’t overpay for much longer.

“That’s why our tax revenues from Wall Street are going to be less, even if we haven’t seen it in the checks they write to us every quarter,” he said. “It’s about to hit us.”

Mr. Bloomberg is anticipating that the city will face a $1.3 billion deficit in fiscal year 2010, and a $4.6 billion deficit in fiscal year 2011.

Another threat to the city’s budget may surface in the next few weeks, when a panel of arbitrators deliberating police salaries is expected to hand down a decision. If the arbitrators give the officers a raise that is greater than the one that has been offered by the city, there would be “an enormous hole overnight in your budget,” Mr. Bloomberg said.

The union that represents police officers has lobbied for such a raise. Mr. Bloomberg said the planned 7% property tax cut might have to be scrapped to make up the difference.

The state also is facing a challenge to its budget in the form of a new lawsuit by Amazon.com. The suit is an attempt to fight a new law that would allow the state to begin collecting sales taxes from Internet sales purchases made by New York residents. The tax is projected to bring the state $50 million in new revenues.

Mr. Bloomberg yesterday defended his decision to keep a property tax cut in place while cutting agency budgets, arguing that he didn’t believe the reductions would hurt service programs or those who use them. His cuts to the education department have trigged the most vocal critics, who are expected to mount a strenuous fight in the coming weeks.

The teachers union and education advocates say they are preparing to launch radio, television, and print advertisements to urge the mayor to restore an education deficit the union estimates is $450 million. The campaign also will challenge Mr. Bloomberg’s assertion that he increased funding to public schools by more than $200 million. The radio ads are expected to begin airing today.

In his budget presentation, Mr. Bloomberg did not discuss the amount of money that would be set aside for the City Council to spend, saying in response to a question that “we always negotiate with the City Council to spend less and they always negotiate to spend more.”

The council is under investigation by the U.S. attorney’s office and Department of Investigation, which is looking into its finances and funding of community organizations. Two council aides were recently indicted on charges that they stole about $145,000 from a city-funded group.

“We understand that we have as great a responsibility, if not greater than ever, to make sure all monies are well spent,” he said.

The council speaker, Christine Quinn, said in a statement that the mayor’s budget includes responsible safeguards for the future, but said cuts to a number of city agencies, most notably the Department of Education, “are a cause for concern.”

The mayor’s financial plan won praise from budget observers, including the Citizens Budget Commission and a senior fellow at the Manhattan Institute, Nicole Gelinas.

“The mayor clearly understands we face a serious situation on Wall Street,” Ms. Gelinas said. “It seems honestly that this is the best he can do under the circumstances.”