The U.S. budget deficit fell by more than half in May from year-earlier levels to $57.64 billion as tax revenues continued to rise, the Treasury Department reported on Friday.

The monthly deficit was far below the $140 billion gap that economists surveyed by Reuters had forecast, and was down from $135.93 billion in May 2010.

Revenues have been relatively strong, given a relatively high rate of national unemployment, but lawmakers still face an urgent need to reach a deal on budget and debt issues to try to get the deficit onto a long-term downward trajectory.

That necessity is heightened by the fact that the 'baby boom generation born after World War Two is beginning to retire in waves and to put more demands on retirement and medical care systems.

The government's financial year starts on October 1.

During the first eight months of fiscal 2011, which ends September 30, the cumulative budget deficit reached $927.44 billion. That is down from $935.61 billion in the comparable period in fiscal 2010.

The Congressional Budget Office, Congress' watchdog agency, forecasts that for all of fiscal 2011 the government will post a $1.4 trillion deficit -- a gap between spending and income that must be covered by borrowing.


Government spending during May declined to $232.55 billion from $282.72 billion a year earlier. The spending figure was helped by a one-time adjustment made by Treasury in the estimated cost the government will incur for the Troubled Asset Relief Program -- the $700 billion program to bail out banks and automakers -- which had the effect of lowering the month's outlays by $45 billion.

As banks and others that received bailouts during the 2007-2009 financial crisis repay the money, the government has been steadily ratcheting down its estimates of how much taxpayers will eventually be left to swallow from TARP.

Receipts during May -- primarily from taxes and mostly on individuals -- rose 19 percent to $174.91 billion from $146.79 billion in May 2010.

The United States hit its legally set $14.3 trillion debt ceiling in mid-May, forcing Treasury to juggle funds while the Obama administration and Republican lawmakers feud about raising the borrowing limit.


Treasury warns it will run out of wiggle room to keep borrowing on August 2, putting the country at risk of a historic default on U.S. debt if Congress has not acted by then.

Asked whether strong May revenues meant Treasury might push back the date for risking default, a Treasury official said the numbers were already accounted for when Treasury last estimated that August 2 was when its maneuvering room expires.

On Thursday, lawmakers agreed to meet more frequently to try to reach a deficit-reduction deal though there are still wide differences between Democrats and Republicans over how to proceed, including whether taxes will need to be raised.

Republicans want deep spending cuts, insisting that tax hikes will crimp an already slow-growing economy and make it all the more difficult to create jobs because companies won't be willing or able to hire.

But there is rising pressure at home and abroad for lawmakers to reach a debt deal. In the past few weeks, three major credit rating agencies have warned they may downgrade the ratings on U.S. Treasury bonds if the debt and deficit standoff is not resolved soon.

Moody's said it wanted to see substantial action by mid-July.

China -- now the U.S.'s biggest creditor and a key source for borrowed money to cover the shortfall between Washington's spending and its income -- issued its own warning this week.

An adviser to China's central bank scolded U.S. lawmakers for playing with fire in debt talks. China holds about $1 trillion of U.S. outstanding debt and any move by Beijing to dump some of it or even limit buying would potentially trigger a loss of confidence in U.S. economic management.

(Reporting by Glenn Somerville; Editing by Neil Stempleman)