July 11 (Bloomberg) -- The Bush administration cut its estimate of this year's budget deficit by 30 percent to $296 billion amid a surge in tax collections from corporations and wealthy individuals.

The projected shortfall is down from the $423 billion deficit the White House forecast five months ago and represents 2.3 percent of gross domestic product, according to the Office of Management and Budget. Last year's deficit was $318 billion.

President George W. Bush today pointed to the decline, contained in a mid-year review required by law, as evidence that tax cuts enacted in his first term are benefiting the economy. Congressional Republicans likely will make the same argument as they ask voters to maintain the party's majorities in the House and Senate in the November elections.

``Tax cuts left nearly $1.1 trillion in the hands of American workers and families and small business owners,'' Bush said in announcing the OMB forecast at the White House. ``They used this money to help fuel an economic resurgence.''

The lower forecast for the fiscal year ending Sept. 30 is driven by higher than expected tax receipts as the economy grew at an annual rate of 5.6 percent in the first quarter, the fastest in two and one-half years. Government revenue has risen 11 percent so far this year even as the war in Iraq -- a total of $319 billion so far -- and the rebuilding of the Gulf Coast after last year's hurricanes -- more than $100 billion -- has pushed up spending.

Receipts

Tax receipts from individuals were projected to be $65.8 billion higher than expected because incomes rose, the budget office reported. Corporate tax receipts were $55.1 billion higher than expected, in part because of rising profits and fewer depreciation write-offs.

The gain in receipts from individuals is expected to include $15 billion in tax receipts from capital gains, White House Budget Director Rob Portman said. Bush won a reduction of the capital gains tax rate in 2003 as part of his tax-cut package.

The revenue growth is not expected to continue, according to the OMB, which forecast a 2.4 increase in receipts next year.

Democrats immediately rejected Bush's contention that the deficit figures were vindication of his policies. They accused the administration of overestimating the deficit at the start of the year so it could now boast about the drop in the forecast and said the revenue increases show the tax cuts mostly benefited corporations and the wealthy.

Criticism

A deficit ``smaller than $300 billion, is that anything to brag about?'' Minority Leader Harry Reid of Nevada said on the floor of the Senate. ``I think not.''

The shortfall, while lower than last year's ``represents a $601 billion swing from the 2006 surplus that the Bush administration projected in 2001,'' Democratic Representative John Spratt of South Carolina said. ``And a deficit of $296 billion is still a large deficit.''

Since Bush took office in 2001, the federal budget has gone from four years of surpluses during the Clinton administration the longest run of black ink since before the Great Depression - - to deficits fed by a recession, tax cuts, the Sept. 11 attacks and wars in Afghanistan and Iraq.

The narrowing of the deficit now doesn't erase the threat of more red ink in future budgets.

Future Obligations

The U.S. is about 18 months away from the first retirement wave of what will be 77 million baby boomers, triggering an explosion of Social Security, Medicare and Medicaid spending.

``No economic boom can provide even a significant fraction of the revenue needed to cover this coming entitlement spending,'' said Brian Riedl, a budget analyst at the Heritage Foundation in Washington.

Riedl was among the analysts who said they are concerned that the jump in revenue is masking a lack of budget discipline. ``One hundred percent of the reduction comes from higher tax revenue and not from any spending restraint by Congress,'' Riedl said yesterday. ``I worry about lawmakers congratulating themselves.''

Bush acknowledged the danger in his announcement, saying the government must ``confront the unsustainable growth in entitlement spending.'' He also said he will continue to spend whatever is necessary to support U.S. troops in the war against terrorism. He blamed the cost of national security for having ``helped create budget deficits.''

Rising Spending

The Congressional Budget Office's monthly budget report released July 7 said spending over the first nine months of this fiscal year was 8.6 percent higher than the same period in fiscal 2005. It attributed much of the increase to hurricane relief, interest on the public debt and the cost of the Medicare prescription drug benefit.

Bush pledged in his 2004 State of the Union address to cut the budget deficit in half by 2009. At the time, the projected shortfall for the fiscal year ending Sept. 30, 2005, was $521.5 billion, or 4.5 percent of gross domestic product.

``We're now a full year ahead of schedule'' toward that goal, Bush said today.

Portman noted that schedule includes new budget assumptions about military operations in Iraq and Afghanistan, which the administration anticipates will cost about $110 billion this year. He also said the federal government would spend $123 billion this year and next to rebuild the Gulf Coast after last year's hurricanes.

Debt

The deficit hit $413 billion in 2004. While the biggest in total dollar terms, it represented 3.6 percent of gross domestic product, a smaller proportion compared with the 6 percent of GDP represented by the $208 billion shortfall in 1983.

By comparison, the Japan's budget deficit was 5.8 percent of its GDP in 2005 and Germany's was 3.3 percent, according to International Monetary Fund figures. ß ß The cumulative deficit during Bush's first six years in office totals $1.4 trillion, more than double the $682 billion cumulative deficit at the same point in Bill Clinton's presidency. Clinton's sixth year in office also was the point at which the budget turned to surplus -- $69 billion -- from deficit.

Overseas investors own more than half of the $4.2 trillion of bills, notes and bonds that the U.S. issues to cover the national debt. The government depends on foreign investment to finance its budget deficit because Americans don't save enough. The U.S. savings rate fell to minus 1.7 percent in May from minus 1.6 percent in April. A negative rate suggests consumers are dipping into savings to maintain spending.

Robert Greenstein, executive director on the Center for Budget and Policy Priorities, which often disagrees with the White House, said the burst of tax collections over the last five years ``is near zero,'' when adjusted for inflation and population growth. ``There is little reason to believe the new figures indicated substantial long-term'' improvement in the budget, he said in a statement issued before the OMB figures were released.

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: July 11, 2006 15:22 EDT