Wall Street Journal writes:

Deficit hawks in both parties won’t like to hear this too much, but the deficit is already falling, even in the face of near-record spending levels. Last year ended with a fiscal deficit of $319 billion — a big number, yes, but down almost $100 billion from the previous year. Many supply-side economic forecasts now see the deficit remaining at slightly above $300 billion for 2006, about 2.5% of GDP. That, according to economist Michael Darda of MKM Partners, is “right about the historical average since 1970.”

The reason for the falling deficit is an economy growing much faster than most forecasters anticipated. Nominal GDP growth has averaged between 6.5% and 7% over the course of this expansion, throwing off tidal waves of tax revenues for the U.S. Treasury. The newest Monthly Treasury Report on federal tax receipts and spending reveals that revenues in 2005 rose by a record $284 billion. Even though spending stampeded forward by $179 billion, the $105 billion difference caused a big fall in the dreaded budget deficit.

None of this was predicted even by the strongest advocates of President Bush’s tax cuts. As usual, the Congressional Budget Office formally predicted that cuts in the dividend and capital gains taxes would produce a shortfall in revenues. Says Dan Clifton, president of the American Shareholders Association: “They were off by a country mile, because actual tax revenues have surged since 2003.”

Even the CBO “dynamic” model, which allegedly takes into account the stimulative impact of tax cuts, “didn’t report much of a growth kick from the 2003 tax cuts,” Mr. Darda adds. Mr. Darda’s analysis shows the growth rate surged from 1.8% before the tax cuts in May of 2003 to an average of 4.1% since.

The deficit reduction of the past two years has occurred even as the congressional spending pandemic rolls on. The new Treasury report indicates that, in 2005, federal spending rose by 7.8% (twice inflation) and in the first three months of fiscal 2006 it has grown at 8.0% — driven in part by big expenditures for Katrina relief.

What’s the biggest threat to continued deficit reduction progress? “That’s easy,” says economist David Malpass of Bear Stearns. “The biggest policy concern for investors is that Congress will fail to make the investment tax cuts permanent.” Though a tax-cut bill is currently being worked over in a House-Senate conference, the Senate version failed to include the two-year extension of the tax cuts and finding 51 votes in the Senate for a conference report that includes the tax cuts would be no slam-dunk, putting the economic expansion in danger. “The evidence is clear that these tax cuts have been self-financing,” says Larry Kudlow, of CNBC’s Kudlow & Company.

Somebody get the word to the moderate Republicans and Democrats in the Senate.

More on the economy here.