Oct. 11 (Bloomberg) -- The U.S. government's budget deficit narrowed to $248 billion in the fiscal year that ended Sept. 30, the smallest gap in four years and less than President George W. Bush's earlier predictions.

Revenue increased 12 percent from the previous year, led by a 27 percent gain in corporate income taxes, the Treasury said today in Washington. Spending rose 7.4 percent to a record $2.65 trillion.

Bush, who inherited a budget surplus when he took office in 2001, said at a Washington press conference that the declining deficit shows his ``pro-growth policies work.'' Economists said the good news will be short lived because economic growth is slowing and Bush is doing little to curb spending.

``If the economy slows below trend, as many economists expect next year, the deficit will go back up,'' Richard Kogan, a senior fellow and budget analyst at the Center on Budget and Policy Priorities in Washington, said in an interview today. ``Last time the economy was at this point, in the late 1990s, we had lower deficits and the expansion turned them into surpluses. No one projects that now.''

For all of 2007, the economy will probably grow 2.6 percent after expanding 3.3 percent this year, according to the median estimate of 82 economists in a Bloomberg News survey completed yesterday. It would be the weakest performance since 2003, when the economy was starting to regain momentum following the 2001 recession.

Skepticism

``I don't want to say this was a one-time bonanza, but it certainly has elements of that,'' said Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York. ``The question is, `Will revenue continue at this pace?' You have to be skeptical about that.''

That's not stopping Bush from trumpeting his economic policies less than a month ahead of midterm elections.

At today's press conference, Bush announced that he had achieved his goal of cutting the deficit in half ``three years ahead of schedule.'' Bush is scheduled to discuss the figures in more detail later today, and he talked about the deficit at a fundraiser last night in Macon, Georgia.

In early 2004, Bush pledged to halve a budget deficit that at the time was estimated to be $521 billion. The actual deficit for the fiscal year that ended in September that year was $413 billion.

The deficit in the fiscal year that ended Sept. 30, 2005 was $319 billion.

Forecasting Miss

The Treasury's figures, released ahead of its regular monthly budget statement tomorrow, also highlight the biggest budget forecasting miss by the government in 21 years.

Government forecasts at the start of the year missed the actual figure by an average of $111.5 billion, a bigger miss than the Reagan administration's $98.1 billion average gap, George H.W. Bush's average of $69.9 billion, and the Clinton administration's $58 billion average.

Bush is also delivering early on his promise to cut the deficit below 2 percent of gross domestic product, down from 3.6 percent in 2004.

Business as Usual

``The question is, does economic growth continue,'' said Douglas Holtz-Eakin, former CBO director and now a member of the Council on Foreign Relations in Washington. ``If you hold the line on spending, then you can stay in the vicinity of where we are, with deficits around 2 percent of GDP. That's business as usual in the U.S.

``That can happen for four, maybe five years. After that, with Medicare and other expenses related to demographics, the deficit is poised to explode.''

Next year, with government spending still on the increase while tax revenues slow along with economic growth, the deficit will increase to as much as $300 billion, according to Goldman Sachs Group Inc. in New York. It may top $400 billion again before Bush leaves office in January 2009.

While the annual deficit has been shrinking, the government's accumulated debt continues to increase. Since Bush took office in January 2001, U.S. public debt has risen 49 percent to $8.55 trillion, compared with a 37 percent increase during Bill Clinton's eight years in office. U.S. interest expense on the debt in fiscal 2006 rose to $405.9 billion from $352.4 billion the previous year.

``Today's confirmation of another large budget deficit is not a cause for celebration, but rather a reminder that a great deal of work remains to be done to get the budget back on the right track,'' John Spratt, a Democratic Congressman from South Carolina, said in a statement.

Record Tax Receipts

In February, the Bush administration predicted a fiscal 2006 deficit of $423 billion, then slashed the estimate to $296 billion three months ago amid record tax revenue. The Treasury on Sept. 15 took in an unprecedented $85.8 billion in taxes, including a one-day record $71.8 billion in corporate levies.

``The tax cuts did help in turning the economy around,'' Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said in an interview. ``Now, the economy is running on its own steam, and if anything, that steam is running out because of housing. Taking credit now risks having to take credit when things get worse next year.''

To contact the reporter on this story: Kevin Carmichael in Washington kcarmichael@bloomberg.net

Last Updated: October 11, 2006 13:58 EDT