The U.S. federal government ran a budget deficit of $318.6B during FY05, down nearly one quarter from the record deficit of $412.1B during the prior fiscal year.As a percentage of GDP, the deficit fell to 2.6% from 3.6% in FY04.

Net receipt growth of 14.6% during FY05 was capped by a 62.5% m/m spike in September. That gain was led by a 31.6% m/m rise in individual income taxes (44% of total receipts) which followed an 18.3% August increase. For the fiscal year, the 14.6% rise in individual income taxes was the strongest since 1981.

Corporate income taxes (10% of total receipts) also reflected the improved economy and spiked higher in September. The 47.0% y/y gain during FY05 was the strongest since 1952 and followed a 43.7% jump the prior year.

The improved job market raised employment taxes (36% of total receipts) 8.8% y/y during all of FY 2005, the strongest increase since 1988.

U.S. net outlays grew 7.9% during FY05. Federal outlays on defense (19% of total outlays) continued to surge but the 8.3% gain during FY05 actually was down from 12.8% growth during FY04 and from 15.9% during FY 03. Medicare spending (12% of total outlays) surged during the last two months and lifted FY05 growth to 10.9%, the strongest since 1992. Spending on social security (21% of total outlays) fell in September and the decline limited the increase during FY 05 to a still high 5.6%. Spending on health programs (10% of the total) rose 4.3% during FY05 while spending on education & training (4% of the total) surged 11.3%. interest expense (8% of the total) grew 14.9% with higher interest rates versus a modest rise last year and declines during the prior six fiscal years.

Do Budget Deficits Cause Inflation? from the Federal Reserve Bank of Philadelphia can be found here.