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Why federal budget deficit is falling faster than CBO expected

The federal budget deficit will shrink this year to $642 billion, the nonpartisan CBO said in a new estimate Tuesday. Just three months ago, it was forecasting a deficit of $845 billion.

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Congressional Budget Office Director Douglas Elmendorf is reflected on a table as he speaks about the office's annual Budget and Economic Outlook during a news conference at in Washington in February. A CBO study released Tuesday cites higher tax revenues and better-than-expected payments from mortgage giants Fannie Mae and Freddie Mac as the key reasons for this year's improved outlook.

Jacquelyn Martin/AP

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After years of trillion-dollar annual deficits, federal red ink is lessening – and pace of the decline now looks much quicker than forecasters thought it would be.

That’s good news for American taxpayers worried about a pileup of debt – and the risk that would pose for their pocketbooks in the future. The debt problem isn’t solved, but this is progress.

Here are the new numbers:

The federal budget deficit will shrink this year to $642 billion, the nonpartisan Congressional Budget Office now estimates. Just three months ago, the CBO was forecasting a deficit of $845 billion for the 2013 fiscal year, which ends in September.

“Relative to the size of the economy, the deficit this year ... will be less than half as large as the shortfall in 2009,” the CBO said in releasing its new estimate Tuesday. The deficit peaked at 10.1 percent of gross domestic product then, but it's on track for 4 percent of GDP this year.

Why is the deficit falling so fast, and will it continue?

The CBO’s predicted budget shortfall has shrunk for several reasons:

• Tax revenues are recovering better than expected – resulting in a $105 billion shift in this year’s deficit, compared with the forecast three months ago. That’s partly from corporate and mostly from individual income taxes.

• The outlook for spending has improved in Social Security, Medicare, and Medicaid. These programs are still huge and growing, but some modest changes in the forecast, such as that fewer people will sign up for Social Security disability insurance, reduces the 10-year outlook for federal deficits by more than $200 billion. However, the downshift in entitlement costs has little effect in the current fiscal year.

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