Fed sees U.S. FY 2008 budget deficit widening further

WASHINGTON (Reuters) - The Federal Reserve said on Tuesday it expects the federal budget deficit to continue to widen during the final three months of fiscal 2008 as the economic slowdown and tax rebate payments eat into government revenues.

In its semi-annual monetary policy report to Congress, the Fed said that the growth of receipts has slowed in response to weaker economic activity while spending growth has stepped up.

Over the first nine months of the 2008 fiscal year ending September 30, the federal deficit was $148 billion higher than the year-earlier period.

"A continued slow pace of economic activity and additional revenue losses associated with the Stimulus Act are expected to widen the deficit further in the final three months of fiscal 2008," the Fed said in the report, released as Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson were due to testify before the Senate Banking Committee.

The rebate checks associated with the economic stimulus package were expected to cut revenues by $115 billion in fiscal 2008 and 2009. A total of $80 billion was distributed to taxpayers by the end of June.

Even without the rebates, federal revenue growth slowed to 2 percent during the first nine months of fiscal 2008 from the prior-year period, compared with 6.5 percent growth for all of fiscal 2007. The slowdown in federal revenues has been most pronounced for corporate income tax receipts due to the decline in corporate profits since mid-2007.

"Individual income and payroll tax receipts -- excluding the stimulus rebates -- also have slowed, likely because of the smaller gains in personal income during the current fiscal year," the Fed said.

After the budget deficit shrank for a third straight year, to $163 billion in fiscal 2007, the White House in February projected a $410 billion budget deficit for fiscal 2008, just shy of the $413 billion record gap in fiscal 2004. Updated White House forecasts are expected later this month.

(Reporting by David Lawder; Editing by Dan Grebler)