Gov. Dannel P. Malloy presented a two-year budget to state legislators on Wednesday in which he proposed increasing spending on education and economic development while cutting hospital and social services funding.

He also relied heavily on borrowing to reduce the state's debt payments and increase available cash flow.

"We made our budget honest, transparent and built to address Connecticut's long-term obligations," Malloy said.

Overall, the state budget would increase by 5.1 percent, to $21.5 billion, in fiscal year 2014, and by 3.9 percent, to $22.3 billion, in fiscal 2015. Revenues are projected to increase by $585 million over two years.

Although the state budget would increase, Malloy said, his budget would reduce spending by $1.8 billion over two years.

Cuts carried over from the December deficit mitigation bill, which included decreases in social services spending, were the deepest. The governor proposed cutting $333.4 million from social services in fiscal 2014 and $544.7 million in fiscal 2015.

Hospitals would lose more than $548 million in state funding over two years under Malloy's plan.

The state would reduce the amount it reimburses hospitals for treating people who are uninsured, said Benjamin Barnes, secretary of the Office of Policy and Management. Hospitals are reimbursed based on how much uncompensated care they provide, he said.

About 10 percent of the state's population is currently uninsured. But once Medicaid eligibility is expanded and the Affordable Care Act insurance exchanges are implemented, the number of uninsured in the state will decrease to 1-2 percent, Barnes said.

"Are we doing it sooner than they are going to see changes in the insurance market? Yes," Barnes said.

The governor also proposed reorganizing aid to municipalities, which could affect municipal taxes. According to his proposal, payments in lieu of taxes — reimbursement for municipalities for tax-exempt state, college and hospital properties — would no longer be distributed independently. Instead, $73 million of PILOT funds would be lumped into Education Cost Sharing funds.

Malloy proposed about $152.3 million in Education Cost Sharing increases. He proposed creating a new agency, the Office of Early Childhood, within the next two years. The early childhood program would require $484.6 million over two years.

He also proposed investing nearly $1.5 billion in bonding for infrastructure for cities and towns over the next two years. More than $980 million would go toward building modern classrooms to help kids learn, Malloy said.

The governor also proposed eliminating the car tax for most vehicles, which would give consumers and businesses a $560 million tax break but leave municipalities with a $560 million reduction in tax revenue.

The assumption is that other taxes, including those for commercial real estate, absentee landlords and rental property, would make up for the motor vehicle tax break, Barnes said.

Malloy also proposed refinancing the economic recovery notes bonded in 2009 under then-Gov. M. Jodi Rell. There remains about $600 million to repay, Barnes said, and the governor is proposing to push the payments back to 2016.

State Rep. Larry Cafero, R-Norwalk, questioned the move.

"It just so happens that means it is outside this biennium, so you won't see that debt service or payment in this biennium," Cafero said. "Is that how you balance a budget? Is that honest or transparent? I think not."

The governor also proposed to continue three "temporary" taxes for fiscal years 2014 and 2015.

Over two years, the 20 percent corporation tax surcharge would bring in $118.4 million. The energy-generation tax would bring in $152 million and the insurance premiums tax utilization cap would bring in $38 million.

Kevin Hennessy, director of government affairs for New England for Dominion, said this was a broken promise and that the ultimate losers would be consumers.

Speaker of the House Brendan Sharkey, D-Hamden, said he was concerned about the tax because businesses prefer a consistent tax policy, but that everything had to be on the table.

Last week, Malloy proposed more than $1.5 billion in bonding for the University of Connecticut for infrastructure enhancements and expanded enrollment. Thursday, the governor said he was sticking to his commitment to economic development by investing $200 million over 10 years for bioscience and health care initiatives through grants, loans and equity.

"It (the budget proposal) furthers a plan we started two years ago, a plan to get our finances in order, to live within our means, and to do it while making bold investments to create jobs and grow our economy," Malloy said.

j.somers@theday.com