U.S. government budget receipts continue to reflect the contraction effects of the nation's worst recession in more than 25 years.

The federal budget deficit increased slightly in May to $189.7 billion as receipts fell while outlays increased for the bailouts and the stimulus program, the U.S. Commerce Department announced Wednesday. Economists surveyed by Bloomberg News had expected the May deficit to total $180.0 billion.

In May, outlays rose to $306.9 billion, up 6 percent compared to May 2008, while receipts, commonly known as revenue, rose to $117.2 billion, down 6 percent versus May 2008.
What's more, for the first eight months of fiscal year 2009, which began in October 2008, the budget deficit soared to $991.8 billion, or more than three times the $319.4 billion posted for the same period a year ago. Outlays increased 19 percent to $2.37 billion in the period, while receipts declined 18 percent to $1.37 billion.

The Obama administration forecasts a record $1.84 trillion deficit for this year, followed by a $1.26 trillion in fiscal 2010. Last year, fiscal year 2008, the U.S. government posted a then-record $454.8 billion deficit.

What, then, is the best way to first reduce, then eliminate the budget deficit? Major U.S. think tanks have decidedly different recommendations.

The Heritage Foundation, a conservative think tank, argues the Obama administration's increased government spending could endanger not only the U.S. economy, but the federal government's credit rating. "The possibility of much higher inflation, which would reduce the real value of the payments received by the holders of U.S. debt, is a very real threat to the economy generally but especially to debt holders and, therefore, to the U.S. credit rating," the Heritage Foundation's J.D. Foster wrote in a research report. Foster recommends that the Obama administration cut the budget deficit by abandoning current policies to increase government spending and taxation.

Conversely, the Brookings Institute, a liberal think tank, says a good way to lower the budget deficit is to raise income taxes on upper incomes groups to 39.6 percent and 35 percent, from the present 35 percent and 33 percent, and to restrict tax deductions to a maximum of 28 percent. Brookings also favors converting deductions to credits, so that all taxpayers get the same benefit from a given dollar. Brookings calls the current $1 trillion-plus deficits "both inevitable and appropriate," given the measures needed to end the recession.

Fiscal Policy / Economic Analysis: A basically inline May budget deficit. As expected, receipts fell and outlays increased, reflecting the extraordinary bailout and stimulus money spending. Further, with 'green shoots' appearing in the U.S. economy, look for the deficit to be lower-than-expected moving forward, with revenue rising as commerce heats up.

That said, the deficit is large and Congress must take actions to bring the deficit down, including income tax increases, discretionary spending cuts, defense spending cuts, and entitlement reform. The long-term goal is a balanced budget. The short-term: reduce the budget deficit to 3 percent of GDP, down from this year's projected 12.9 percent of GDP.

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