WASHINGTON – The federal budget deficit for March showed a dramatic decline Monday because of a much lower estimate by the Obama administration of how much the financial bailout program will ultimately cost.

The Treasury Department said the March deficit totaled $65.4 billion. That compares with a $191.6 billion deficit a year ago. But $115 billion of the improvement was due to the administration’s lower estimate of the cost of the Troubled Asset Relief Program.

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job seekers are reflected into a mirror while waiting in line to attend a career fair presented by National CareerFairs in San Jose, Calif. The Obama administration said Monday that huge deficits have been necessary to prevent an even deeper recession. The Associated Press

The lower bailout estimate had already been included in the administration’s budget, which it sent to Congress in February. It had not been included until March in the Treasury’s monthly accounting of spending and revenue, however.

HEADING FOR UNPRECEDENTED LEVEL

The deficit through the first six months of this budget year totals $716.99 billion. That’s a drop of 8.2 percent from the same period a year ago. Still, the administration projects that the deficit for all of 2010 will hit an all-time high of $1.56 trillion — up from last year’s $1.4 trillion record.

The projected full-year deficit is being driven up by the impact of the recession, which has cut into government tax revenue while driving up spending.

Spending is higher because of the costs of the bailout to aid financial firms, auto companies and homeowners facing foreclosure. The spending has also soared because of the government’s economic stimulus program, plus heavier burdens on such programs as unemployment benefits and food stamps.

Mark Zandi, chief economist of Moody’s Analytics, said roughly one-third of the increase in the deficits over the past two years came from lost revenue. That reflected fewer people working and lower corporate profits.

He said another one-third came from the increased government spending that occurs automatically in a downturn. It includes higher payments for unemployment benefits and food stamps.

The final one-third reflected the increased government spending from the economic stimulus bill and the $700 billion financial bailout fund.

For the first six months of the current budget year, government receipts total $953.9 billion. That’s down 3.6 percent from the same period a year ago.

But in an encouraging sign the economy is turning around, tax receipts in March were higher than a year ago. That marks the second straight month that tax receipts rose from a year ago. Before February, receipts had declined from the same period in the previous year for 21 straight months.

Government outlays totaled $1.67 trillion through the first six months of the current budget year, 5.7 percent lower than the same period a year ago. That decline reflected, in part, the lower estimate for the cost of the financial bailout. The $114 billion reduction in the bailout costs left the cost for that program at $117 billion.

With the economy still weak, the interest rates the government must pay to finance the red ink have remained low. But economists fear that could change if investors start to worry about the government’s ability to restrain future deficits. China is the largest foreign holder of U.S. Treasury securities.

The administration projects that the deficit will remain above $1 trillion next year as well. That would give the country three straight years of $1 trillion-plus deficits. Under the administration’s budget projections, the deficit will not drop below $706 billion for any year in the next decade.

The administration says the huge deficits have been necessary to prevent an even deeper recession. But Republicans have attacked the stimulus spending for failing to do enough to boost employment. The jobless rate in March remained at 9.7 percent for a third straight month, though payrolls grew by 162,000.

CBO PREDICTS HIGHER DEFICIT

The budget that President Obama sent to Congress in February projects that the deficits over the next decade will total $8.53 trillion. But the Congressional Budget Office forecasts that under Obama’s spending plans, the deficits during this period will total an even higher $9.8 trillion.

Federal Reserve Chairman Ben Bernanke warned last week that the nation will have to make painful choices to control the deficits.

“The nation will ultimately have to choose among higher taxes, modifications of entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above,” he said in a speech in Dallas.

Obama, by executive order, has created an 18-member fiscal reform commission. The commission is charged with producing a plan to shrink the deficit to 3 percent of the economy — from 10 percent last year — within five years. The plan is scheduled to be unveiled in December.

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