The federal budget deficit for March was $65.387 billion, which was sharply below (65.9%) the $191.589 budget deficit of March 2009. It was also well below the $220.909 billion in February, however the data is not seasonally adjusted, but is highly seasonal, so the month-to-month comparisons are less noteworthy.

We are now halfway through the fiscal year. Fiscal year to date, the budget deficit is showing an improvement over a year ago, totaling $716,990 billion, an 8.24% reduction from the $781,391 billion worth of red ink in the first half of fiscal 2009. That is a step in the right direction, but the deficit is still far too high for the long term. Given the depth of the recession, it is a necessary evil right now.

For the month, we saw an increase in revenues of 18.95% year over year to $158.358 billion. Most of the improvement from a year ago came from much lower outlays. At $218.745 billion, they were 31.8% lower than a year ago. Most of the reduction in outlays was due to less money being spent on the Wall Street Rescue (TARP) than a year ago. Fiscal year to date, tax collections are down 3.62% to $953.896 billion, while spending is down 5.66% to $1,670.885 billion.

The Treasury "budget" includes things that are "on-budget" and "off-budget," with the latter being mostly Social Security. For years, a surplus in Social Security has helped to hide the true size of the operating budget deficits the country is running. This is still true today, although much less so than in years gone by. The on-budget recepts are the ones that are on everyone's mind this week with tax day approaching. Those are down 3.23% so far this year to $648.716 billion.

The off-budget receipts, which are mostly the Social Security taxes that are taken out of your paycheck (and matched by your employer, so the real rate is double what shows on your pay stub) are down 4.43% to $305.179 billion. If you are unemployed, neither you nor your employer will be paying payroll taxes.

On the spending side, on budget outlays fell by 7.97% to $1,401.708 billion. Those are the expenses that one normally associates with governement spending, including the military, the salaries of federal employees from Obama on down, interest on the Federal debt, and most of the transfer payments with the exception of Social Security and Medicare.

The improvement in the year-to-date spending comes even in the face of a 19.8% increase in the interest on the national debt to $201.929 billion. Off-budget spending (Social Security benefits) rose by 8.54% to $269.10 billion. Thus, Social Security is still running a surplus so far this year, but it is much smaller -- only $36.074 billion rather than the $71.379 billion surplus in the first half of 2009.

This report is very welcome news, but it probably will not last. Much of the year-to-date improvement has come from the big banks like Bank of America (BAC) and Goldman Sachs (GS) paying back the TARP, and that is not going to last forever. However, much of the spending is fixed, most notably the interest on the debt.

Federal salaries make up a very small portion of the overall expenditures, especially if you are only looking at civilian salaries. Declining tax revenues have played a bigger role in the expansion of the deficit over the past few years than has increased spending. Some of that was deliberate -- for example, about one-third of the ARRA (the Stimulus Bill) was in the form of tax cuts.

However, most of it was simply due to lower overall economic activity. People out of work are not paying as much in income taxes, and small businesses earning less and thus having less income to tax. This would not be a great time to increase taxes or cut spending, since either would impose a drag on the economy when it is still very weak. However, we do need a plan to bring down the deficit sharply in the future, and to do so will require both tax increases and spending cuts.

Read the full analyst report on "BAC"

Read the full analyst report on "GS"

Zacks Investment Research