The federal budget deficit (search) shrank to $3.44 billion in December, and the shortfall for the first three months of the budget year is running 8.9 percent below the red ink of a year ago.

The Treasury Department (search) said Wednesday in its monthly budget statement that the deficit from October through December totaled $118.61 billion, down from $130.16 billion during the same three months in the 2004 budget year.

The government ran up a record deficit in dollar terms of $412.3 billion for the 2004 budget year which ended last Sept. 30. President Bush has pledged to cut the deficit in half by the end of his second term.

In its mid-session review last July, the administration projected that the deficit for the current 2005 budget year will decline to $331.3 billion, which would represent an improvement of 20 percent over 2004, and fall to $260.6 billion in 2006.

The Congressional Budget Office estimated in early September that the deficit for 2005 would shrink to $348 billion with the shortfalls gradually easing to $65 billion by 2014. That would give a 10-year deficit total of nearly $2.3 trillion.

That CBO forecast assumes no changes in taxes or spending policies for the next decade. Democrats contend the shortfalls will be much worse if the Republican-led Congress goes along with Bush's ambitious proposals for a second term including overhaul of Social Security and the tax code and making permanent the tax cuts of Bush's first term.

The CBO estimates making Bush's tax cuts permanent would add $2.2 trillion to the shortfalls through 2014, including the government's added borrowing costs. Easing the alternative minimum tax's impact on middle-income earners would cost another $435 billion.

Both the CBO and the administration will update their forecasts in coming weeks. The administration revisions will be part of the president's submission of his 2006 budget plan to Congress on Feb. 8.

In the first three months of this budget year, the government had total receipts of $487.2 billion, up 10.5 percent from the same period a year ago, while outlays totaled $605.8 billion, an increase of 6.1 percent over the previous period.