The director of the Office of Management and Budget, Joshua Bolten, will submit the White House’s mid-session review of the federal budget to Congress today, with some good news for those who believe the federal budget deficit has been too big. Just last February, Mr. Bolten was predicting a 2005 deficit of $427 billion, about 3.5% of America’s gross domestic product. But the betting is that today’s estimate will reduce that number by about $100 billion.

The new chairman of the Council of Economic Advisers, Ben Bernanke, hinted about the numbers in an address at the American Enterprise Institute yesterday, saying that the deficit may fall well below projected levels because of growing tax revenue. “Estimates of growth in wage and salary income have been revised upward substantially, raising the possibility that the labor market may be even stronger than we thought,” he said.

“One consequence of the strong income growth we are enjoying,” Mr. Bernanke added, “is higher than expected levels of tax collections so far this year, which if maintained with spending control will reduce the government’s budget deficit for this year well below its projected level.” Mr. Bernanke also noted that the unemployment rate has now fallen to 5%, the lowest level since September 2001.

The Congressional Budget Office has already announced that it will reduce its deficit estimate for 2005 to about $325 billion, a 24% decline from the previous estimate. “An expanding economy, creating more receipts, is putting us on a very good path to deal with our deficit,” the secretary of the Treasury, John Snow, remarked at a press conference last week. “It’s pretty clear now the path we are on will take us below the president’s initial target.”

That is, beyond President Bush’s campaign promise to cut the deficit to about 2.25% of GDP by 2009. It turns out that government revenues are growing faster than either the Congressional Budget Office or the Office of Management and Budget predicted at the beginning of the year. In its current Monthly Budget Review, the CBO reported that government revenues were 14.6% higher during the first three quarters of fiscal year 2005 than during the same period last year, while spending was up 7.4%.

Higher individual income tax receipts accounted for more than half of the revenue growth, with net collections from individuals up by $105 billion, or about 18%, over last year. Almost two thirds of the increase, some $66 billion, came from higher receipts from nonwithheld taxes – that is, taxes on income outside of regular paychecks, such as capital gains on stocks and other investments. In this case, much of the increased revenue – as much as $30 billion, according to some Wall Street analysts – came from the exercise of stock options, reflecting last year’s growth in the stock market.

Net corporate income taxes increased by about $57 billion, or 41%, according to the Congressional Budget Office. Part of this increased revenue results from strong economic activity in 2004 and the first half of 2005. But businesses also face higher taxes this year, since accelerated depreciation provisions enacted in 2002 expired at the end of 2004. According to an estimate by the Joint Committee on Taxation, $51 billion of the revenue increase derives from the expiration of accelerated depreciation.

“Were it not for the depreciation provisions, corporate tax revenue would be rising at 10%,” a senior fellow at the Center on Budget and Policy Priorities, Richard Kogan, told us. Last fall’s Homeland Investment Act, which allowed companies with foreign profits held offshore to bring the funds back to America at a lower tax rate, also boosted corporate tax revenue somewhat.

This is not to say that the American economy is not demonstrating strong growth. In fact, the lesson of the new deficit numbers is that America’s economy is stronger than anyone predicted. And the rising federal revenues are matched by growing revenues at the state level as well. Mr. Bush also deserves credit for enacting tax cuts that spurred economic growth and helped prevent deep recession.

But much of the dramatic and unexpected drop in the deficit results from transient factors, such as changes in tax laws and last year’s stock market surge. So it’s no time for Mr. Bush or the Republicans in Congress to wax complacent in respect of supply-side tax cuts of the kind that provide incentives for growth and to remember that the growth in non-military spending, unlike the growth in revenues, shows no signs of slowing down.