updated 8/24/2007 8:18:48 AM ET 2007-08-24T12:18:48

The federal deficit for 2007 will be lower than it was last year, but the budget outlook over the long term remains "daunting" because of growing health care costs, the Congressional Budget Office said Thursday.

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The deficit for the budget year that ends Sept. 30 will be about $158 billion, or $90 billion less than the deficit recorded for 2006, the nonpartisan agency reported. The revised figure is about $19 billion below the deficit that the office projected on March 1 for the current budget year.

Higher-than-expected tax revenues are the main reason for the improved numbers, the office said.

Unsustainable fiscal path
"The long-term fiscal outlook continues to depend primarily on the future course of health care costs," according to the update. "Although there is some risk that problems in the housing market and disruptions in financial markets may spread and impair economic growth," it said, "the most likely scenario is that economic performance will remain sound."

The update said inflation and unemployment should remain comparatively low in the coming year. But Peter Orszag, the office's director, said the nation continues to put itself at financial risk by allowing government health care costs to outstrip people's income, year after year.

"We are on an unsustainable fiscal path," Orszag told reporters, mainly because of steady rises in the costs of Medicare and Medicaid. The two programs now consume 4.6 percent of the economy, he said, and that will rise to 5.9 percent by 2017 under current projections.

The proportion will continue to climb in future decades unless federal policies change, Orszag said. "We have done much too little" to address the problem, he said.

Markets and mortgages
The budget outlook "for the long term remains daunting," according to the report.

Orszag said the near-term economic outlook is "particularly clouded right now" because of a turbulent stock market and problems with subprime mortgages. But his agency does not see such problems preventing "continued solid economic performance."

The recent growth in government revenues has come mainly from individuals rather than corporations, which accounted for unexpected revenue increases this decade, Orszag said. Wealth has become more somewhat concentrated among the very highest income earners, he said, and those people pay taxes at the highest marginal rates.

Sen. Kent Conrad, chairman of the Senate Budget Committee, said the report does not absolve President Bush of blame for returning the government to deficit spending.

"The $5.6 trillion surplus projected when the president took office has been wiped out," Conrad, D-N.D., said in a statement. "The nation's debt burden continues to climb at the worst possible time, just before the retirement of the baby boom generation."

Bush said the estimate was good news for taxpayers.

He used the update to urge Congress to pass individual spending bills by the end of the fiscal year in September. "Congress has an opportunity to rise to the occasion and work with my Administration to accomplish a balanced budget without raising taxes," he said.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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