U.S. Deficit Falls to $135.9 Billion in May, but Deep Budget Issues Remain

The May U.S. government budget deficit, which came in at a smaller-than-expected $135.9 billion, provides further evidence that the economic recovery is under way, but it shouldn't deflect Capitol Hill budget-makers from the key task of deficit reduction, according to one well-positioned fiscal observer: Federal Reserve Chairman Ben Bernanke.

The month's deficit number represents a 28.3% decline from the $189.6 billion deficit recorded a year ago in May 2009, when the deficit ballooned higher due to fiscal stimulus and bank bailout spending. A Bloomberg survey had forecast a $140 billion deficit for May. The government posted an $82.7 billion deficit in April.

Further, for the first eight months of this fiscal year, which began Oct. 1, 2009, the budget deficit totaled $935.6 billion, compared to $992 billion for the same period last year.

The report's most encouraging data point was the ongoing trend in corporate tax receipts: For the first eight months of the fiscal year, corporate tax receipts are up 17.4% to $81.5 billion compared to the same period a year earlier.

The same cannot be said, however of individual income tax revenue, which is down 7.8% for the period to $546.4 billion. It's clear that payroll reductions related to the recession are continuing to drag down income tax receipts. Still, the 7.8% decline represents an improvement over the the 11.6% year-over-year decline in April.

The Obama administration has forecast a $1.6 trillion deficit for the current fiscal year. The U.S. government posted a record $1.42 trillion deficit in fiscal 2009, following a $454.8 billion deficit in fiscal 2008.

U.S. Budget: On An Unsustainable Path?

In Wednesday testimony before the House Budget Committee, Fed Chair Bernanke, said "the federal budget appears to be on unsustainable path." However, he also underscored that no one should panic.

"To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges," he said.

The key, according to Bernanke, is developing a viable, realistic, long-range deficit reduction plan. He argued that the actions required would not be easy, but said that if Congress acts now, the pain and adjustments will not be as severe as would be caused later, when the large tax increases and sharp cuts to services would fall on an aging U.S population.

There's a Chinese saying that goes, "Many hands make the work light." Fed Chair Bernanke appears to be suggesting that many years will make the deficit reduction task light, as well.