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A tamed US deficit, but can it last?

At $205 billion, the 2007 deficit is expected to be half its '04 peak, as corporate tax revenues surge.

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After years of unrelenting deficits, Washington may be experiencing a break in its fiscal weather. Strong tax revenues mean that the 2007 shortfall between US income and spending will be the smallest it has been since 2002, according to new White House estimates.

But these rays of progress may be fleeting, say some experts. Revenue growth is already slowing, and defense spending and huge entitlement programs such as Medicare continue to expand at a rapid clip.

"It is always good to see the deficit coming down, but there is little about the current situation to inspire confidence that the trend will continue," says Robert Bixby, executive director of the Concord Coalition, a budget watchdog group.

First, the good news. According to the Office of Management and Budget's annual mid-session review, the federal budget deficit is now predicted to come in at $205 billion for the fiscal year that ends this October.

That's $43 billion lower than last year's deficit and about half the recent peak of $413 billion, hit in 2004. In fact, it's $15 billion lower than OMB predictions of only five months ago.

The big reason for the improved budget picture? Tax receipts. Specifically, higher-than-expected corporate tax liability, due to high profits, according to the mid-session review.

In addition, the federal government has had to pay out less than it expected in refunds of the federal telephone tax.

At a budget briefing on July 11, President Bush said the lower deficit figures showed that his economic policies were working, and that Congress should make permanent tax cuts passed at the beginning of his administration. Many of those cuts expire in 2010.

"Over the last three years, tax revenues have grown 37 percent. That's one of the highest jumps in revenue on record," said Mr. Bush.

Now, the bad news. The OMB mid-session review also predicts that the deficit will tick back up in fiscal 2008 to $258 billion.

The administration's long-term forecasts still show the budget reaching surplus in 2012. But that estimate assumes there will be no unexpected expenses for combat in Iraq or Afghanistan, note critics of the administration's budget policies.

Plus, when Bush took office, the federal budget was in the black. The plunge in red ink, due largely to his tax cuts and post-September 11 defense spending increases, occurred on his watch.

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