Business your connection to The Boston Globe

Budget deficit widens in May to $67.7b

But tax revenue rise is expected hold '07 shortfall to $150b

WASHINGTON -- The US budget deficit widened in May from a year earlier while tax revenue kept the government on course to finish the year with a smaller annual shortfall.

The $67.7 billion deficit for last month compares with a deficit of $42.9 billion in May 2006, the US Treasury said in its monthly budget statement yesterday. Most of the difference is because the Treasury this year processed more tax returns and recorded more payments in April instead of May.

Since the start of the fiscal year on Oct. 1, the budget deficit totaled $148.5 billion, down 35 percent from a shortfall of $227 billion a year earlier. For all of this year the shortfall could narrow to $150 billion, the Congressional Budget Office said May 4. That would be the smallest deficit this decade. In fiscal 1998-2001, the Treasury posted yearly budget surpluses.

"It's a healthy economy; more people are working and paying more taxes," said Gary Thayer, chief economist at A.G. Edwards & Co. in St. Louis. "The basic strength of revenues comes from jobs."

The Treasury has been awash in cash, reflecting increased tax revenue from rising wages and stock market gains. In April, the government posted a surplus of $177.7 billion -- the highest in six years and 50 percent higher than the April 2006 surplus.

The Treasury's borrowing needs have changed in turn and on May 2 the government said it would end the sales of three-year Treasury notes. The note is a barometer of the government's financing needs. Sales stopped in 1998, at the start of a four-year run of surpluses, and resumed in 2003 after record shortfalls created by war and tax cuts.

"Unless there's a recession or the stock market takes a dive, things look pretty good," said David Wyss, chief economist at Standard & Poor's in New York.

In May, total government spending fell 1.5 percent from a year earlier to $231.9 billion, according to the Treasury, and revenue fell 14.8 percent to $164.2 billion for the month. So far this fiscal year, both spending and revenue are records, according to a Treasury spokeswoman.

According to the CBO, revenue collected during May was about $28 billion lower than what was collected last May. The decline was mostly because the IRS "processed a greater proportion of individual income tax returns in April this year than in 2006."