Nov. 2 (Bloomberg) -- The U.S. Treasury Department cut its estimate for government borrowing in the current quarter by 43 percent largely because of reductions in a program for helping the Federal Reserve manage its balance sheet.

Borrowing will total a net $276 billion from October through December, compared with a previous estimate of $486 billion, and it projects borrowing of $478 billion in the three months to March 31, the department said in a statement today in Washington. In the quarter that ended Sept. 30, the Treasury borrowed $393 billion compared with $406 billion projected three months ago.

The Treasury is financing a budget deficit that may exceed $1 trillion for a second straight year, even as the economy starts to recover. U.S. gross domestic product grew at a 3.5 percent annual pace in the July-to-September period, after falling 0.7 percent in the prior three months, Commerce Department figures showed last week.

“The budget deficit, while not expanding, is still at levels unimaginable a few years ago,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. In New York. “With receipts on the weak side, the Treasury will have its work cut out for it when it comes to financing the government’s flood of red ink.”

Fed Program

Today’s estimates include $15 billion for a special program for helping the Fed finance its operations. The so- called Supplementary Financing Program for the Fed was cut back to $15 billion outstanding from $200 billion in September, in order to avoid approaching the debt limit.

When the Treasury sells bills at the Fed’s behest, it drains reserves from the banking system and makes the central bank’s job of controlling interest rates easier.

The Treasury projected a cash balance of $85 billion at the end of December and $45 billion at the end of March. At the end of the current quarter, $15 billion of the expected cash balance will be due to SFP borrowing.

Today’s estimates for the current quarter were in line with analysts’ expectations, which projected borrowing needs of $245 billion to $300 billion for the October-to-December quarter. Analysts had forecast borrowing of $385 billion to $450 billion in the January-to-March quarter.

Treasury officials today declined to comment about when the country’s $12.1 trillion debt ceiling might be reached. Earlier estimates indicated the limit might be reached by December.

Hiring Outlook

The Treasury’s chief economist, Alan Krueger, said the economy is starting to recover from the worst recession in the postwar period. “It will take time for the pickup in economic activity to translate into renewed hiring but labor market conditions should improve with sustained and solid economic growth,” Krueger said in a statement.

The Treasury said borrowing needs may be greater than anticipated.

“Corporate tax receipt declines may signal near-term declines in other receipt categories,” the department said in documents released today. Volatility in spending and revenue “related to fiscal stimulus and financial market stability programs could lead to increased near-term marketable financing needs,” it said.

The record for the October-to-December quarter was set last year, when the Treasury had borrowing needs of $569 billion as the government pumped money into the $700 billion Troubled Asset Relief Program and also ramped up the SFP.

$1.4 Trillion

The U.S. budget deficit widened to a record $1.42 trillion in the 12 months to Sept. 30 as the administration increased spending to rescue the economy. The shortfall for the 2009 fiscal year was more than triple the $455 billion record set a year earlier, the Treasury said last month.

The Congressional Budget Office in August predicted a deficit of $1.38 trillion in fiscal 2010.

Primary dealers expect the government to post a deficit of about $1.4 trillion this year, with forecasts ranging from $1.2 trillion to $1.6 trillion, the Treasury said.

Treasury’s borrowing estimates were issued ahead of the Nov. 4 release of its quarterly refunding, when the amounts of long-term note and bond sales are released.

Bond analysts expect the Treasury this week to announce $81 billion in long-term debt sales, according to the median estimate of five forecasts in a Bloomberg News survey. The total includes $40 billion in three-year notes, $25 billion in 10-year notes and $16 billion in 30-year bonds.

More Supply

“The market can take supply, so the size of these issues may not cause near-term indigestion,” said William O’Donnell, U.S. government bond strategist at RBS Securities Inc.

The Treasury expects the average maturity of its total outstanding debt to plateau at 66 months over the next 10 years, the department said today. The average maturity of issuance is expected to rise to 77 months, and the percentage of issuance with three years or less until maturity is on course to fall to 53 percent, the Treasury said.

The government also is expected to change its Treasury Inflation-Protected Securities, or TIPS, program to include 30- year bonds instead of 20-year bonds. The Treasury has been discussing the switch with bond dealers in the run-up to this quarter’s refunding period.

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.netVincent Del Giudice in Washington vdelgiudice@bloomberg.net.

Last Updated: November 2, 2009 15:41 EST